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Investors can wait for Sun to shine in Japan and China

Historically, strategy formulation and execution has been one of the key strengths of Sun Pharma.

Updated: Nov 08, 2019, 08.39 AM IST
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India’s largest pharma company’s second-quarter performance was better than expected but poorer than what it logged in the preceding quarter, although net profit climbed 13 per cent after factoring in an adjustment to the year-ago quarter.

Sales rose 16 per cent, aided by its domestic business, and operating profit margins were maintained at 22 per cent. However, revenue from the US business remained flat, and Taro’s performance was muted.

After adjusting for the exceptional item of Rs 1,214 crore for Q2 last year, the net profit growth was 13 per cent, Sun said. Shares of Sun Pharma climbed 3 per cent to Rs 440.

“Our Q2 and H1 performance demonstrates sustained growth momentum and is inline with our full-year guidance. We continue to focus on cost savings and efficiency improvement to align our generic business with the changing industry dynamics,” Sun Pharma MD Dilip Shanghvi said. “Simultaneously, we continue to progress on building our global specialty business.”

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To be sure, there is no broad-based improvement in the US generic business and the market continues to remain competitive. Sun continues to focus on cost savings and efficiency improvement to align it with the changing industry dynamics. The company is still finding its footing in the specialty business in the US, sounding optimistic about its dermatology drug Ilumya.

Historically, strategy formulation and execution has been one of the key strengths of Sun Pharma. It remains to be seen how Sun Pharma’s strategic bets across its businesses play out. It is spending a fourth of its R&D budget toward its specialty business, investing in branding, promotion and staff for the business. At a time when most of its peers are exiting the Japanese market, Sun Pharma is expanding into it through acquisitions. The company is aggressive in China as well, forging joint ventures and tying up licensing agreements to be among the earliest to tap the revenue potential of the world’s second-largest drug market.

“We see a great potential to introduce our speciality and generics products in the growing China market and this licensing agreement is another positive step in that direction,” said Kal Sundaram, director of corporate development, Sun Pharma.

The strategic shift means that investors have to be in a wait-andwatch mode. The outcome of Sebi’s forensic audit is also awaited. The Sun Pharma stock is now trading at 24 times its trailing four quarters earnings, and its price has declined a fourth in the past one year.

Data from Bloomberg showed that nearly half of the 42 analysts tracking the stock are bullish on it, but with a very modest target that is 7.5 per cent higher than the current price. Sun’s second-quarter performance doesn’t provide much direction for long-term investors. Time correction, rather than price correction, is more likely to happen until clarity emerges on the regulatory front. The outcome of Sebi's investigation would be the next key trigger for the Street.
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