Sun Pharma: Guidance overhang despite good Q1 show

Approvals for US launches and clearance of Halol plant key for Sun Pharma's earning upgrades

Sun Pharma posted strong growth for the June 2016 quarter. The Street had been anticipating a good set of numbers considering the upside from oncology drug Gleevac generics, which had been launched under exclusivity during the previous quarter, and a stronger dollar. The company's US subsidiary, Taro, also boosted overall show as its margins of 61 per cent were ahead of Street estimates. This led Sun Pharma to post better-than-expected operating profit margins as well as net profits.

Sun Pharma's revenues at Rs 8,006 crore grew 22.7 per cent year-on-year (y-o-y) and were in line with Bloomberg consensus estimates of Rs 8,003 crore. Taro had reported $233.8 million sales that marked a growth of 8.6 per cent y-o-y. Operating profit for Taro at $142.6 million compared to $134.4 million in the year-ago quarter and margins at 61 per cent were ahead of estimates, say analysts. Taro posted a net profit of $109.9 million compared to $103.6 million in the June 2015 quarter.

Sun's operational profit at Rs 2,922 crore came ahead of Bloomberg consensus estimates of Rs 2,835 crore and profits at Rs 2,033.7 crore were ahead of estimates of Rs 1,923 crore. Domestic sales, which constitute 23 per cent of the company's overall sales, grew eight per cent y-o-y.

In spite of this beat on profitability and good results, the stock closed at Rs 801.80 levels, down 0.88 per cent. This is because the Street had factored in strong performance in the June 2016 quarter, but is not sure on growth in the coming quarters. Sun Pharma management has already given a muted 10 per cent growth guidance for FY17, which indicates the coming quarters might remain subdued, after the exclusivity period for Gleevac generics coming to an end. The company's Halol plant remains under the US Food and Drug Administration (FDA) scanner and clearance of the same remains crucial for approvals of new launches gathering pace.

Some experts say a resolution for Halol would come as soon as the company completes remediation. In another positive development, the company got an approval for the launch of generic version of diabetes drug Glumetza extended release tablet. Lupin had launched Glumetza generics on exclusivity and post the exclusivity period in August, Sun is also expected to launch the product. Analysts at Motilal Oswal Securities say this approval signifies successful site transfer from Halol by Sun and believe the company would have also de-risked other key products awaiting approval. This limited competition product launch is to contribute 1.5-2 per cent of Sun pharma's FY17/FY18 net profit, say analysts. Thus, more such product approvals will be key for Street sentiment to improve, which might translate into earnings estimates getting revised upwards.