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There’s hope yet for Sun investors

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ET Intelligence Group: Litigation woes impacted the performance of Sun Pharmaceutical Industries, the largest pharma company in the September quarter.

Now, a surprise loss due to additional provisioning of Rs 1,214 crore towards settlement of antitrust litigation related to Modafinil drug is bound to irk Sun’s investors.

The company had already accounted for Rs 974 crores in the preceding quarters. The Street seemed to have preempted the company’s subdued performance as Sun Pharma stocks closed 4.7 per cent lower ahead of the results announcement. The disappointment was accentuated as Q2 results came after encouraging results in the preceding two quarters.

Overall sales growth slowed to 4 per cent after 16 per cent growth in the preceding June quarter. US finished dosage sales were 11 per cent lower sequentially.

Domestic market sales were down 16 per cent from the year ago level because of a planned inventory reduction and a high base year effect.

Despite the subdued performance on the revenue front, the firm maintained its operating profit margin at 22 per cent. Managing director Dilip Shanghvi saying the soft Q2 performance is not a reflection of the underlying health of the overall business may provide only slight consolation to investors keen to know whether the Q2 performance is exception or the rule in the company’s growth trajectory this fiscal. For those wondering about the fate of their investments in the company — this may not be the time to exit.

The stock is trading at half of its record high of Rs 1,200 in 2015.

The challenging phase for the company is testing the execution skills of its management.

Sun has a strong specialty products portfolio in the US with focus on dermatology and ophthalmology.

It has commercialised two specialty products (Yonsa Ilumya) this year and is slated to launch one more. This is likely to increase selling expenses in the near term.

Thankfully, the generic price erosion in the US has started to abate and is likely to continue in the next few quarters.

The management expects a gradual increase in approvals after Halol plant clearance.

In India, it is the largest player with the highest market share with leading brands in the top 300 brands. Amidst intensifying competition, Sun is in an evaluation mode of its expenses portfolio — rationalising its RD expenses, inventory and ANDA portfolio.

Though there is always the risk of a negative surprise on the regulatory front, investors can hopefully look forward to a more efficient operation in the coming quarters. Of the 43 analysts tracking the stock 20 had a buy recommendation ahead of the Q2 results.

The stock is currently trading at 55 times of its earnings of the past four quarters.




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