Home / Markets / Mark To Market /  Sun Pharma Q3 result only a brief reprieve for investors

Sun Pharmaceutical Industries Ltd’s strong earnings performance in the December quarter (Q3) brought brief respite for investors. After opening the day’s trading session with decent gains, the stock closed 1% lower on Wednesday. The gyration reflects continuing investor unease with the company’s corporate governance issues.

The 48% jump in operating profit on the back of 16% rise in revenue came as a positive surprise. Profit margins expanded a whopping 5.8 percentage points to 27%, with help from forex gains and lower research and development expenses. Even after adjusting for one-offs, profit margins and operating earnings were notably higher than Street estimates.

But concerns over corporate governance remain an overhang. Sun Pharma said it has responded to queries from market regulator Securities and Exchange Board of India (Sebi), and is transferring the domestic distribution business to a wholly owned subsidiary. Still, there are concerns that transactions between Aditya Medisales and other promoter group firms came at the cost of minority shareholders.

Concerns about related-party transactions have been an overhang on the Sun Pharma stock.
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Concerns about related-party transactions have been an overhang on the Sun Pharma stock. (Sarvesh Kumar Sharma/Mint)

“We expect investors to remain cautious in the backdrop of the whistle-blower’s complaint to SEBI and its possible outcome. These issues are likely to outweigh the company’s sound fundamentals in the near term," analysts at ICICI Securities Ltd said in a note on Wednesday.

On the positive side, the Q3 results show recovery in its India business. With the pricing in the US, another key market, being stable and gross margins expanding, Sun Pharma can see a cyclical recovery, point out analysts at Jefferies India Pvt. Ltd.

But if one excludes the contribution of its American arm Taro, sales in the US were flat or up just 2% on a sequential basis. To mitigate the impact of a steady erosion in generic drug prices, Sun Pharma is building its specialty drugs business, although the progress has been mixed.

For instance, the company delayed the launch of one specialty drug, and withdrew another drug launch citing financial unviability. Several more specialty drug launches are lined up for this calendar year. As these products hit the market, the much-watched specialty products business will take shape in FY20.

But for these drugs and the specialty business to attain scale, Sun Pharma will have to step up spending on promotions and sales teams. This can keep costs elevated in the coming year, weighing on earnings, fear some analysts. “The management expects frontloading of costs to continue as the company continues to invest in specialty launches," added analysts at ICICI Securities.

To conclude, Sun Pharma may have delivered better-than-expected earnings in Q3, but as far as its share price performance goes, much depends on the resolution of corporate governance issues and the ramp-up of the specialty drugs business in the US.

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