Sun Pharma shares a good buy despite short-term pain

Investors who bought Sun Pharma shares in the past few weeks believing that the stock was oversold and that the downsides were priced in could be in for a negative surprise. The warning letter received by the company’s Halol plant is likely to spark a sell-off in the stock fuelled by earnings downgrades on the Street.

Is Sun Still a Good Buy?

For many on the Street, the development isn’t surprising. Two earlier events hinted that a warning letter was imminent. First, talking to analysts after the September quarter earnings, the Sun management informed about the Halol facility receiving an 'Official Action Indicated' report from the US Food and Drug Administration (USFDA). Such an inspection takes place when there are significant objections and a regulatory action is warranted to address the lack of compliance. Second, the company also transferred the manufacturing site of high value generic drug Gleevec to another site as a derisking measure.

It typically takes one to two years to restore compliance standards in a facility which has faced a clampdown. Sun’s Karkhadi facility, which received import alert from the USFDA in March 2014, is yet to become FDA compliant.

However, the Halol plant is critical for Sun’s growth, contributing a high single digit percentage to the Sun’s total revenues and is the only facility from where the company has filed application in the US for injectable drugs. Therefore, its regulatory compliance is a priority area for the company.

Incidentally, in spite of the warning letter, the company has not revised its revenue growth guidance for the FY16. Investors could hope for an early resolution at Halol before 12-15 months — the period it typically takes to restore standards.


Resolution of issues at Halol and integration of Ranbaxy may slow down Sun’s growth, but cannot deny it. Justifiably, the stock is 34% lower than its record high of Rs 1,200. Investors can take solace from the fact that the institutional holding in the stock has steadily increased during the past three quarters. Weakness in the stock, at the current level, is likely an opportunity to get it at an attractive valuation.