Street positive on Sun Pharma's health despite disappointing Q4 results

US litigation issues remain the firm's Achilles heel

Sun Pharma’s March quarter (Q4) performance disappointed the Street on all fronts. 

Sales at Rs 7,044 crore, though up 5 per cent year-on-year (YoY), missed consensus estimates of Rs 7,537 crore. Operating and net profit, too, were significantly below estimates. The Q4 show was, however, impacted by a change in distribution arrangement for the India business, pegged at Rs 1,085 crore. 

India sales, which contribute about a fourth to overall sales, were down 44 per cent YoY. Adjusted for this change, India revenues were in line with estimates. Nevertheless, the US business showed some traction, marking 20 per cent growth in constant currency terms. 

While analysts had been expecting traction led by a ramp-up in Sun’s specialty portfolio, the growth was also driven by supply of a generic medication to a customer — to be serviced over six months starting Q4. 

Given the high margin nature of such supplies, this is expected to boost US margins. Ramp-up of the specialty portfolio in the US was the key reason behind the Street’s cheer. Products such as Cequa (eye medication) and Ilumya (dermatology) are shaping up well and analysts feel Ilumya can garner peak sales of $300-500 million. 

Managing Director Dilip Shanghvi highlighted the company’s focus on the global specialty strategy. 

“Ilumya is expected to gradually gain traction in the US in FY20, while the launch of Cequa is expected in the coming months,” he said.

Analysts at Jefferies, too, expect Sun Pharma’s base business to recover in FY20 as they its domestic growth to lag the industry, and growth in emerging markets and rest of the world to be steady at 12 per cent.

Meanwhile, analysts feel the 12 per cent growth, adjusted for one-offs in FY19, is satisfactory. Purvi Shah at Sharekhan said that Q4, adjusted for non-recurring items, would have resulted in higher sales growth.

However, Shah maintains a ‘hold’ rating, given the US price collusion litigation case. outcome will continue to remain an overhang.