Sun Pharmaceutical Industries Ltd: Niche drug!
(BSE Code: 524715) (CMP: Rs.483.30) (FV: Re.1)
Established in 1983, Mumbai-based Sun Pharmaceutical Industries Ltd (Sun Pharma) is an Indian multinational pharmaceutical company with 26+ manufacturing locations globally, which manufactures and sells pharmaceutical formulations and active pharmaceutical ingredients (APIs) primarily in India and USA. It offers formulations in various therapeutic areas such as cardiology, psychiatry, neurology, gastroenterology and diabetology. It also provides APIs such as warfarin, carbamazepine, etodolac and clorazepate as well as anticancers, steroids, peptides, sex hormones and controlled substances.
Sun Pharma hit the capital market in 1994 and its IPO was oversubscribed 55 times. The acquisition of Ranbaxy in 2014 has made Sun Pharma the largest pharma company in India, the largest Indian pharma company in USA and the 5th largest speciality generic company globally. During Q1FY18, it posted a loss of Rs.425 crore due to a one-time hit (~Rs.950 crore) related to anti-trust litigation settlement of generic drug Modafinil. Sun Pharma’s Halol manufacturing plant in Gujarat on which the USFDA had slapped observations post inspection and banned exports since December 2015 is set to revive. The costly remedial measures are now over and re-inspection is expected by the USFDA regulator soon. The dark clouds over the company will start receding slowly as the pharmaceutical sector in general and Sun Pharma in particular post robust sales and profits beginning FY19 given the heavy investments in speciality business and its pipeline of complex generic product launches in USA and other regulated markets slated for FY19.
The US generic business, from which most Indian pharma companies like Dr. Reddy’s, Glenmark, Cipla and Aurobindo Pharma derive most of their revenues, will continue to witness intense competition and healthy price erosion. Although Sun Pharma has literally eroded Rs.125000 crore of market cap and investors’ wealth over the last two years, we strongly believe that at the CMP, the stock is really attractive as it trades at 16x FY19E and 24x FY18E earnings. Brace for tough quarters in the rest of FY18 to reap good-to-better returns from Sun Pharma in FY19. Investors can consider buying this stock at the current level for over 50% returns within two years, with very limited downside.