Near term growth concerns to weigh on Sun Pharma

Regulatory clearances remain crucial for US growth

Sun Pharma has acquired 85% stake in OJSC Biosintez, a Russian company. With that, it gets a facility in Russia, which saw total pharma distributor-to-retailer sales of $10 billion in 12 months to September 2016. Russia and Commonwealth of Independent States (countries part of the Soviet Union) saw $200 million in sales in FY16.

The facility in Russia can drive growth as local units there are needed to bid for government projects. The government accounts for about 30% of total market, says Motilal Oswal Securities. Thus, acquisition at enterprise value to sales ratio of 1.15 is attractive, say analysts.

On flip side, Mohali plant in India got seven observations from the US. Religare Institutional Equities says most are benign. But, this means clearance time by the US remains uncertain. This plant, acquired in Ranbaxy deal, has not been a contributor to Sun's US sales, but was necessary to boost the Street's confidence in the company's ability to resolve Ranbaxy plant issues.

The focus shifts to Sun's Halol plant clearance by the US. Though the company is said to have completed most remediation measures, clearance time again remains uncertain. Sun achieved 18% sales growth during first half of FY17, primarily on exclusivity launch in the US. At the end of first half, Sun did not revise its FY17 sales growth forecast of 10%, indicating soft second half. Analysts at Bank of America Merrill Lynch (Bofa-ML), who see net profit growth of 36.7% in FY17 (primarily on exclusivity launch), have pegged FY18 net profit growth at 11.2%. 

Thus, clearance of Halol plant is crucial for net profit upgrades. However, most analysts remain positive on long-term prospects, considering the strong pipeline. Bofa-ML says Sun deserves premium valuation relative to sector average, but near-term concerns hold it back. The stock, gradually declining since it hit its all-time high in April 2015, closed 2.5 per cent lower at Rs 683.6 on Thursday, and could remain range-bound till positives.