Sun Pharmaceutical Industries Ltd’s stock is down by a fifth from a year ago as of Friday when it declared its March quarter (Q4) results. Whether the rest of FY19 turns out differently for investors depends on whether it can deliver on its promises.

In FY18, its revenue declined by 14% chiefly because the US generic drugs business failed to deliver. Even after adjusting for currency fluctuations and GST-related effects, revenue still fell by 9.5%. The worst may be over, it appears from the Q4 results, and also from the management’s guidance of a low double-digit growth in FY19. Still, investors will remain cautious.

Some key launches expected in the US market are one reason behind Sun Pharma’s guidance. While it is confident of delivering on those, another pillar for the guidance is the pending clearance of its Halol plant from the US Food and Drug Administration. The long-pending resolution of this plant has affected its launch pipeline and investor confidence in Sun Pharma as other companies have succeeded where it has failed.

The management said they expect to complete their remedial actions by the second quarter of FY19. A green signal from the US FDA subsequently should clear the path for approvals from this facility. Given the repeated regulatory setbacks for this plant, investors will probably wait for confirmation before factoring recertification in their estimates.

In the March quarter, Sun Pharma’s US revenue rose by 12.2% sequentially which was attributable to better showing by specific products and gains in market share. If this continues in the current fiscal, it will be good. The company also expects to launch three speciality products. While these will also see costs increase due to hiring and marketing, they should contribute to revenue growth too in the medium to long term.

Sun Pharma’s domestic sales too are improving though GST-related accounting changes are affecting reported numbers. While it reported 2% growth in the quarter, it said full year reported sales growth of 4% would have been 9%, adjusted for GST-related effects. The market itself is recovering and Sun Pharma’s domestic growth in FY19 should look better, barring any uncertainty caused by government policy.

Overall, Sun Pharma’s revenue in the March quarter declined by 2.2% over a year ago and rose by 4.9% sequentially.

Its profitability improved by 2.3 percentage points sequentially to 24.1%. This was chiefly due to a higher gross margin.

Sun Pharma said that they intend to rationalize their US generics portfolio and weed out unprofitable products. A better product mix and lower material costs are two reasons that could contribute to higher gross margins. If gross margins sustain at higher levels, that can be another positive signal. Even on the research front, the company intends to focus its spending on speciality products and rationalise R&D spends too. That too could lead to better margins.

Much of what Sun Pharma’s management is saying and doing seems sensible. The numbers too indicate that the company’s performance is on the mend. The two uncertainties are whether its long tryst with the US FDA for its Halol plant ends in its favour in FY19, and whether pricing pressure or any other new policy hiccups trips up its US generics business again. If none of that happens, then FY19 may well be the year when Sun Pharma finally sees some sunshine on the valuation front.

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