Sun Pharma’s profit warning may not go down well with the Street

Just days ahead of announcing its June quarter performance, Sun Pharma issued an unexpected business update today guiding for flat to negative growth in revenues and a possible adverse impact on the bottomline. It implies that the Ranbaxy integration along with the remediation process of US FDA compliance issue at the Sun’s Halol plant has started impacting the growth of the overall business. This is not likely to go down well with the investor community – with a significant correction and earnings downgrades in offing for the Sun stock in the near term. The stock has appreciated 28% since the past one year, against 57% gains made by ET Pharma Index.

In its update, Sun has increased the target for the synergy benefits from the Ranbaxy acquisition by 15-20% as compared to its original target of US$ 250 million by FY18. It has undertaken various remedial measures to address the deviations from good manufacturing practices at its Halol facility. These remedial measures have resulted in supply constraints for some of the products. This situation is expected to continue for some more time till all the remedial steps at Halol are completed. As a part of the Ranbaxy integration process, the company expects to incur certain integration charges in order to generate long-term synergies from the merger. Also, as a part of the integration process, Sun may decide to discontinue certain non-strategic businesses. The above initiatives will help the company revert to a more sustainable growth trajectory post FY16. Sun will be better placed to pursue higher than industry growth in subsequent years.

From the information shared by the company, it appears to be a case of near term pain for long term gain. However, for investors who were expecting Sun to live up to its reputation of turning around distressed assets without rocking the boat much would be in for a disappointment. Sun’s peers like Lupin and Dr Reddy’s might stand to gain on the Street in the near term as investors scout for more promising growth stories in the immediate term.