Sun Pharma shares touch new lows as pricing pressure in US continues

Highlights: 

• Sun Pharma shares touch 52-week low. 
• In Q4FY17, Sun Pharma net profit declines by 14% and sales down by 8%.
• Many analysts have downgraded their ratings on Sun Pharma. 

Shares of Sun Pharma dropped over 10% during intra-day trading on Monday May 29, 2017 touching its lowest point in over a year. The stock opened at Rs 653.95 per piece on May 18, 2017, has now lost a third of its value. 

On Monday, share price of Sun Pharma was trading at Rs 507.25 per piece on BSE, down Rs 61 or 10.78%. It has already touched a 52-week low of Rs 493 per piece – a level last seen on on December 30, 2011.

Not only this, Sun Pharma has declined by 64.80% in one year. On this day of last year – share price of Sun Pharma stood at Rs 812 per share level.

During Q4FY17, Sunpharma's top-line (revenue) and bottom-line (net profit) both saw decline of 7.96% year-on-year (YoY) and 13.58% year-on-year (YoY) to Rs 6,825.16 crore and Rs 1,223.71 crore respectively.

Dilip Shanghvi, Managing Director of Sun Pharma said, “Our Q4 performance reflects the impact of the challenging generic pricing environment in the US. Despite we continue to invest our strong cash flows in enhancing our specialty pipeline.”

Many analysts have downgraded their ratings on Sun Pharma. Here's why:

A CLSA report said, “Sun's Q4FY17 results were the worst in years despite adjusting for one-offs. Key negatives were a 25% decline on quarter-on-quarter (QoQ) in US sales due to higher pricing pressure across products.”

Citibank's research wing said, "Sun is one of the more exposed among Indian companies to US price erosion, given the high pockets of supernormal pricing in its base business and inability to launch products from Halol."

HDFC Securities stated that Sun Pharma adjusted for an inventory write-off in 4QFY17, it came in at 25.7%, still significantly lower than our estimates. "This was owing to lower contribution from Gleevec, reduced Taro profits and price erosion in the ex-Taro business," it said. 

Management of Sun Pharma expects  continuation in pricing pressure in its US generic operation on the back of enhanced competition and channel consolidation. 

Taro contributes over 20% of Sun Pharma's sales and 40% in its consolidated profit.

Phillip Capital said, "With on‐going pricing challenges, and limited visible product opportunities for Taro in the near future, we see continued pressure on Taro’s margins and earnings growth. Factoring these, we cut Taro’s FY18/19 PAT estimates by 12% to $ 455/488 million. We foresee about 5% cut to our FY18/19 earnings estimates of Sun.”

HDFC Securities feels the benefits arising from the Ranbaxy will go in developing the specialty business in the form of R&D and promotional costs. 

Such would lead to further pressure on the EBITDA margin in FY18/FY19E, especially with the Halol facility not yet cleared and Taro profits continuing to erode, it said. 

While presenting the Q4 result, Sun Pharma indicated a single-digit sales decline for the current financial year. 

CLSA has downgraded Sun Pharma's rating to 'Sell' from 'Buy' with a revised target of Rs 500 a piece from previous Rs 860 a piece. 

Citi said, "We reflect the higher uncertainty on earnings by moving to a lower target PE (23x vs. 25x earlier) on March'18E EPS, yielding our new target price of Rs.680 a piece."