Ranbaxy deal to kick in, Halol overhang on Sun Pharma:Brokerages

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Moneycontrol BureauSun Pharmaceutical Industries, India’s largest drug maker by sales on Tuesday posted a net profit decline of 5 percent to Rs 1471.8 crore in the third quarter ended December due to subdued sales growth in US and India. The revenues of the company grew by 8 percent to Rs 7683 crore in the third quarter. Most analysts noted that Q3 results were below estimates, but maintained their buy rating on the stock revising the target price on a lower side on hopes of early Halol resolution, Ranbaxy synergies, US specialty play kicking in and normalisation of India business. Here is what brokerage firms have to say about Sun Pharma's Q3 results.Citi has a buy call on Sun Pharma, with reduced target price to Rs 900 from Rs 970. The brokerage house raised FY17 EPS estimates by 4 percent but cut FY18/19 estimates by 7 percent/5 percent. On the positive side Citi noted synergies on the Ranbaxy deal coming through as expected and good progress in building a specialtypipeline. On the flip side, it said a possible delay in fresh approvals from Halol plant, rising competitive intensity in the derma space and the ongoing US department of justice (DoJ) enquiry would remain overhangs in the medium term.Nomura maintained its neutral rating increasing the target price from Rs 726 to Rs 734. The brokerage firm cut FY17 earnings estimates for Sun Pharma by 9 percent, FY18 by 5 percent and FY19 by 3 percent after Q3 earnings missed analysts' expectations. Nomura noted that the generic business of Sun Pharma isunder pressure, primarily due to price erosion in the US. Any further delay in resolution of the Halol situation presents risks to our near-term estimates. Nomura said that Sun’s efforts to build its specialty pipeline is critical to counter increasing completion in generic business in the medium term. "The specialty portfolio creates an option value that limits the risk of a significant P/E derating, in our view," it said. CLSA maintained a buy call, reducing the target price to Rs 790 from Rs 800. The research firm also cut FY17-F19 EPS by 1-4 percent and said Sun Pharma’s near-term outlook could remain soft in the absence of any major US launch. On a positive side it noted that Ranbaxy synergies remain on track while specialty pipeline will strengthen further.IDFC Securities maintained its buy call, but cut the target price by 17 percent to Rs 720. The brokerage house reduced FY17 and FY18 earnings by 6 percent and 14 percent, respectively. IDFC said any delay in Halol plant’s FDA issues resolution have added to near-term challenges arising out of heightened price erosion in Taro’s derma franchise. The stabilisation of India and EM business (+17 percent yoy growth in 9mFY17), continued cost optimization along with possible Halol issue resolution by H1FY18 should help to drive earnings recovery from H2FY18 onwards, it said. ICICI Securities maintained its buy rating on the stock with a target price of Rs 832 from earlier Rs 834 with downward revision of EPS by 2.4 percent in FY17, 6.4 percent in FY18 and 5 percent in FY19. The brokerage firm lists pickup in base US sales with potential for higher growth post Halol clearance, recovery in domestic formulations in FY18, 19.7 percent adjusted net profit CAGR over FY16-19E, and attractive valuations 20.2x FY18E and 17.2x FY19E and success on specialty front as key drivers for the company over FY18-19.Morgan Stanley retained its equal-weight rating on the stock, with reduced target price at Rs 690 from Rs 762. FY17, FY18 & FY19 EPS estimates cut buy 5.4 percent, 5.4 percent & 4.1 percent, it says. JPMorgan says Sun Pharma's EBITDA (earnings before interest, tax, depreciation and amortisation) miss was due to lower ex-Taro gross margins. Halol & ex-Taro performance are key drivers, it feels. The research firm is overweight on the stock, with reduced target at Rs 750 from Rs 775. Goldman Sachs has maintained buy rating on a favourable risk-reward on Sun Pharma but lowered target price to Rs 824 from Rs 836. It expects 14 percent EBITDA CAGR over FY16-19.Karvy has retained its hold rating on the stock with a target price of Rs 697, down from previous target price of Rs 737. The brokerage house reduced its EPS estimates for FY17E by 16.2 percent to Rs 27.1 and by 9.5 percent to Rs 30.3 for FY18E. On account of downgrade in earnings and possible long-term implications due to DOJ investigation we downgrade our price target to Rs 697 based on multiple 23x FY18E, Karvy said.