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Sun Pharmaceutical Industries is at the forefront of earnings downgrades in the current financial year, as analysts believe it has limited growth levers in the near term. Also, the factors that contributed to its dismal performance in the March quarter are expected to impact sales and earnings in the first two of this financial year. The big risk is loss of market share in the US. The company failed to meet its 13 per cent sales forecast for FY15. Its Halol plant received observations from the US Food and Drug Administration (FDA) on manufacturing practices last October, which impacted sales in the third and fourth quarter in FY15. Analysts peg sales of $125 million in a quarter from this plant.
Analysts have revised Sun’s sales and earnings forecast down as a result, as resolution of issues at Halol is expected to take much longer than earlier anticipated. Also, remediation costs for the plant would be in addition to Ranbaxy’s four plants, which would put pressure on margins, too. Prabhudas Lilladher has revised sales and profit estimates downwards. “With weak visibility in achieving resolution at Halol in the near term, we believe sales from Halol (assume $125 million a quarter) from the plant) will continue to cause a problem for the company for the next three to four quarters.”
Higher remediation costs would also impact the margin profile and market share in FY16. While many brokerages are maintaining margin between 32 and 35 per cent for FY16, there is a downside risk to this, as remediation costs would be higher for Ranbaxy’s four plants and Sun’s Halol facility. There’s also risk of market-share loss, if Sun is not able to resolve supply issues soon. JM Financial says despite having tentative approval for gAbilify, Sun did not get final approval, which could be due to ongoing issues at Halol. To overcome such constraints, the company might go for another opportunistic acquisition in cash, which could be immediately accretive, believes JM Financial. However, the firm ruled out any large acquisition in an interaction with analysts, as it has its hands full with the Ranbaxy merger.
Analysts are concerned about the decline in revenues in the March quarter. Sales fell 10 per cent sequentially to Rs 1,560 crore in the March quarter. Revenues from the US were down 11 per cent to $488 million, which could be due to price pressures and supply disruptions at Halol. Most brokerages have revised target prices of the stock downwards, as growth challenges in the medium term do not support premium valuations.
