Sun Pharma investors just suffered a bloodbath, but should you buy?

Pharma-major Sun Pharma stock has emerged as a worst performer on the benchmark indices Sensex and Nifty 50,,so much so, that it has today tumbled by over 7%. Sun Pharma ended at Rs 520.90 per piece below Rs 40.80 or 7.26% on Sensex.The company even touched an intraday low of Rs 520.50 per piece on the index, resulting in overall tumble of 7.33%. Such an selling pressure, comes a day after when the company had posted its September 2018 quarter (Q2FY19) result, where it revealed a consolidated net loss of Rs 218.82 crore. Sun Pharma saw losses in its book on the back of one-time settlement of Rs 1,214.38 crore with respect to Modafinil antitrust litigation in the US.

Sales on the other hand, stood at Rs 6,846 crores, growth of 4% over same quarter last year. Sale of branded formulations in India for Q2FY19 was Rs. 1,860 crores, down by 16% mainly due to a planned one-time inventory reduction in the supply chain coupled with a higher base of Q2 last year.

Talking about the Q2FY19 result, Dilip Shanghvi, Managing Director of the Company said, “Our soft Q2 performance is not a reflection of the underlying health of the overall business. We continue to focus on strengthening our core operations and enhancing our overall efficiencies. We are fairly positive on our performance for the rest of the year. We are excited with the successful launch of Ilumya in the US."

Should you invest in Sun Pharma post Q2FY19 result?

Deepak Malik, Ankit Hatalkar and Aashita Jain, analysts at Edelweiss Financial Services said, “Even after the Halol clearance, business has not stabilised; it continues to face multiple challenges: i) rising business costs due to entry in the US specialty segment where payback is unclear; ii) depreciation of emerging market currencies impacting sales; and iii) inventory destocking at super distributor level.”

The trio added, “Sun’s domestic business is among the best and the largest in 12 chronic categories. In the US, the company is one of the early entrants in complex products and is now foraying into specialty products. However, near-term challenges and investments in the specialty business eclipse the medium-term outlook for the company.”

Following which, analysts at Edelweiss said, “ We are pruning the FY19E and FY20E EPS by 5% each, cutting the multiple from 25x to 23x and downgrading the stock to ‘REDUCE/SU’ from HOLD/SU.” They have given a Reduce outlook from previous hold with a target price of Rs 500.

On the other hand, Sharekhan said, “ Sun Pharma has been investing significantly for building a specialty franchise in the US. The company has launched Ilumya, a psoriasis drug, in Q2, the full benefits of which shall be reflected more in H2FY2019.”

In Sharekhan’s view, “The management maintained its low double digit growth guidance for FY2019 consolidated sales. With a better product mix and cost control measures, we see some scope for an expansion in margins in the next two years, FY2020 onwards.”

Finally Sharekhan added, “ Taking cues from the management’s commentary we have revised our earnings estimates downward by 10% each for FY2019E, FY2020E and FY2021E. We maintain our Buy recommendation on the stock with a lower price target (PT) of Rs. 695, valuing the stock at 21x its FY2021E earnings.”