The stock is down by nearly 38% from its April'15 peak & may be bottoming out
For Sun Pharma, 740-725 might be a good buying zone for 875-935 in the near term
Successful Halol Plant compliance resolution and Ranbaxy integration holds the key---
CMP: 757
Buy around 740-725;
TGT: 790-835-875-935 (1-3M)
TGT: 975-1075-1135-1200 (12-24M)
TSL< 715
Note: Consecutive closing below 715 zone for any reason, Sun can fall up to 690-675-650 & 619-600-570 area, where it may be again accumulated for better investment buying average.
Scrips of both Sun Pharma slumped for the last few days after the company missed estimates for Q2FY16 and also cut guidance for the rest of the FY-16. In addition to that, market is also concerned over its Halol plant compliance issues with USFDA.
Another pharma major DRL got an official warning from USFDA recently and analysts are concerned over the similar fate for Sun Pharma also. There are market buzz that Sun has already got an OAI (official action indicated) and there is higher probability that it will also be issued with a warning letter from USFDA.
This Halol plant of ex-Ranbaxy has been under USFDA observation for quite a long time and the company is finding great difficulties for fresh approvals on product launches from this plant.
Although the management has assured that the company is doing its best for "original remediation" of the Halol Plant, keeping the USFDA in loop "at great frequency", the market is concerned about its impact on US business and profits in FY-16.
But keeping in view the likely benefit of Ranbaxy integration (synergy), analysts are giving an average TP of around 900 for the Sun Pharma scrip, significantly down from earlier projections.
Q2FY16 result was also below street estimates, although the company has already issued "profit warning" in advance.
Q2 consolidated PAT declined by around 46% (YOY) to Rs.1107 cr due to lower sales growth, cross currency headwinds/volatility and supply constraints.
Another disappointing fact was that its domestic (India) sales, which contributes around 26% of its revenue has grown by only 1% in Q2 (YOY). The company attributed it to inventory control, withdrawal of product bonus offer (to trade), relatively soft season in the acute segment and erratic monsoon this year (seasonal ailments).
The US sales, which contributed around 48% of Sun Pharma was also declined 28% (YOY) due to competitive pricing pressure, supply constraints at Halol Plant and high base for the last year's same quarter.
Looking ahead, the company is confident about prescription sales growth in India and resolution of its Halol Plant and fresh product approvals from USFDA.
There may be pricing pressure on US market due 2016 presidential election year as its inviting lots of criticism for high prices of medicines in US from their politicians, but its an industry wide issue.
Looking at the time & price action & the recent correction on the Sun Pharma scrip, the above sets of bad news may be already discounted by the market to a great extent.
Technically, 740-725 is a strong support zone for Sun and its need to sustain over 790 for some meaningful rally up to 875-935 in the near term.
As par BG metrics & current market parameters:
(On consolidated TTM & FWD EPS)
Present median valuation of Sun Pharma may be around: 800 (FY:15/TTM)
Projected fair valuations might be around: 855-950-1120 (FY:16-18/FWD)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| SUNPHARMA | 18.14 | 95.99 | 40 | 798.72 | 781.71 | 790.22 | 879.21 | 842.16 |
| SUNPHARMA | 20.85 | 115.25 | 40 | 856.31 | 838.07 | 847.19 | 879.21 | 842.16 |
| SUNPHARMA | 25.75 | 138.75 | 40 | 951.62 | 931.36 | 941.49 | 879.21 | 842.16 |
| SUNPHARMA | 35.95 | 165.75 | 40 | 1124.41 | 1100.47 | 1112.44 | 879.21 | 842.16 |
Analytical Charts:
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