Will Sun Pharma get its mojo back on Dalal Street?

ET Intelligence Group: If Sun Pharma’s March quarter performance provided hopes of a possible revival to the Street, the June quarter earnings further cemented it. It is difficult not to be optimistic about Sun Pharma’s prospects, given the recent events. Besides an encouraging quarterly run, the clearance for the Halol facility by USFDA after a long-drawn resolution increases the possibility of recovery in sales and boosts investor confidence.

The company’s underperformance seems to have bottomed out in FY18. Aided by a low-base effect, Sun Pharma posted a 16% growth in net sales — it’s best in the past eight quarters with the operating margin at a healthy 22.5%.

The June quarter performance stands in sharp contrast to the results in FY18. India sales grew 22% against a growth of 2% in the preceding quarter. Sales from the US market, contributing over a third of the overall turnover, increased 8% despite subdued performance of its subsidiary Taro.


Having commercialised its specialised product Yonsa in the US, Sun has a target to launch two more products in the US this fiscal. There is likely to be a scale-up in complex ANDA filings and more aggressive spend on R&D. Despite the 7% jump following the results, Sun Pharma’s stock is trading near levels they were at five years ago, having peaked at around ₹1,200 in April 2015.

It is trading at 40.4 times its earnings. Improved profits in FY19 should lead to a moderation in valuations. At present, 44% of the analysts tracking the company’s stock have a ‘buy’ recommendation.

However, investors still need to be cautious. Prospects are tough for generic companies in the US as they battle price erosion, increased competition due to record approvals of generic drugs and a thinner pipeline. As founder Dilip Shanghvi pointed out in the earnings call, cost control and improving efficiencies have become imperative to overcome these challenges. However, there are limits to these.

The company has forecast increased expenses on R&D (for specialty and differentiated products) and upfront investment toward the planned launch of specialty products. These would impact the bottomline.

There are expectations that the company would successfully navigate the headwinds, especially since its faithful investors have been waiting patiently for it to deliver growth in kilter with its past track record. But investors must bear in mind that generics are no longer an easy business.