Sun Pharma: Valuations factor in the downsides

Sun Pharmaceutical has shed 40 per cent of its market capitalisation from its 52-week high of Rs 1,200.70 a share this April. While issues related to the Ranbaxy integration, regulatory worries over its Halol plant and US performance were reasons for the stock fall, what particularly spooked investors was the proposed wind energy investment of $250 million. Though Sun was expecting substantial tax benefits from this investment from FY18, the markets were unnerved as this was the first time the company was planning investments in unrelated assets. Also, the project involved related third party Suzlon, where the firm’s promoter,  Dilip Shanghvi, and his family has substantial stake.

The shelving of this plan is a positive, according to analysts at CLSA, as this allays fears on the company’s capital allocation strategy. They like Sun’s business model and earnings growth prospects over the next few years and believe Sun is positioning itself strongly to capitalise on the differentiated products opportunity in the US. Their sum of the parts valuations peg the target price for the stock at Rs 975, valuing Sun’s base business at Rs 942 a share and one-time opportunities such as launch of the generics of cancer drugs Gleevec and Doxil at Rs 33.

While its presence in niche areas acts as a strong entry barrier and is its unique selling point, the valuations, too, have turned attractive at current levels. The stock, according to most analysts, is trading at compelling valuations of 20 times its FY17 earnings. While the concerns on profits remaining under pressure due to costs related to Ranbaxy integration and the company’s Halol plant still under US Food and Drug Administration scanner are factored in at current prices, investors are keeping an eye on the triggers, especially related to launches ahead. Timely generic launch of oncology drug Gleevec by February will be one such important trigger. Analysts believe synergistic benefits of Ranbaxy integration will start flowing from FY17. The company has a pipeline of products for the US, good growth in domestic arena, and a healthy balance sheet with cash of Rs 10,000 crore, says Sarabjit Kour Nangra at Angel Broking, who has a target price of Rs 950. While most analysts have target prices in the Rs 920-1,050 range, the Bloomberg consensus target during November was at Rs 883. This translates into around return of 21 per cent from current levels.

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