(Graphic: Naveen Kumar Saini/Mint)
(Graphic: Naveen Kumar Saini/Mint)

Sun Pharma: investors relieved, but stock’s upside may be capped

  • The overhang may not yet be done and dusted as Sebi is yet to communicate its final decision to Sun Pharma
  • In the past three months, the Sun Pharma stock has also outperformed the Nifty Pharma index

Sun Pharmaceutical Industries Ltd has been getting a dose of some bitter-sweet medicine. Following the Halol plant’s positive review by the US Food and Drug Administration (USFDA) in mid-August, news reports suggest that whistle-blower’s allegations against the company may continue to be an overhang.

Earlier, reports indicated that a preliminary enquiry committee set up by the capital market regulator found no merit in the allegations, driving the stock prices higher by 6.2% over the last three trading days. In the past three months, the Sun Pharma stock has also outperformed the Nifty Pharma index.

Yet, the overhang may not yet be over as the Securities and Exchange Board of India (Sebi) is yet to communicate its final decision to Sun Pharma.

Note that the whistle-blower allegations have kept the stock under pressure for some time now. The stock has lost 35% from its peak in September 2018.

“The corporate governance issue has been a big overhang on the Sun Pharma stock. If you consider the news of Sebi’s investigation of not finding anything wrong in terms of divergence of funds, as well as on foreign fund-raising, to be true, then this huge concern is now behind. If there is no clean chit, there could be further volatility. A positive has been that its Halol plant has got a clean chit from the US FDA," said Krishnanath Munde, pharma analyst at Reliance Securities Ltd.

Besides, the progress over its first-quarter performance needs to be considered. Its specialty chemicals business, where analysts had pencilled better growth rates, undershot the Street’s expectations.

Recently, Sun Pharma said it was developing an early-stage pipeline for its specialty business. So, that may be an advantage. Additionally, the domestic business has reported decent growth, while the US one has also been steady. Operating margins have held steady, boosting Q1 FY20 net profit, which was up 31% year-on-year.

However, there are not too many triggers. “One trigger for the stock would be an uptick in the US specialty business," notes Munde.

Hence, for investors, being on the fence and waiting for more clarity from Sebi may do no harm. It will also give them time to evaluate whether Sun Pharma is building on its Q1 FY20 performance.