Sun Pharma’s March quarter results indicate a patchy road to recovery

  • As the company re-routed India distribution to its own entity, domestic sales slumped 44% last quarter
  • As domestic business normalizes, the management expects revenues to expand in low to mid-teens in FY20

The distribution realignment in India, triggered by the whistle-blower complaint, impacted Sun Pharmaceutical Industries Ltd’s performance in the March quarter. As the company re-routed India distribution to its own entity, domestic sales slumped 44% last quarter. This weighed on overall revenues, which grew just 5%. Excluding the impact, revenues would have grown 21%, largely driven by the US business that received a large order.

As domestic business normalizes, the management expects revenues to expand in low to mid-teens in FY20. But continued investments in specialty drug business means costs will remain elevated. This can weigh on profitability, according to the management. Research and development (R&D) expenses as a percentage of sales is projected to rise to 8-9% in the current financial year from 7% a year ago.

The higher expenditure guidance triggered a revision in earnings expectations. “We cut our FY20 margins by 200 bps as we factored a higher R&D and substantially higher specialty promotional spend. We also reduced FY21 margins by 100 bps, led by higher R&D (50 bps) and some increased spend in specialty. Consequently our FY20/21 earnings per share falls by 10/3%," Jefferies India Pvt Ltd said in a note. One basis point (bps) equals one hundredth of a percentage point.


The reduction in earnings estimates also underscores slow revenue recovery expectations. Revenues at the much-talked about specialty drug business is seeing only gradual ramp-up, reflecting distribution challenges. While pricing pressure in the US generic drug business abated, competition continued to remain high. “Near-term challenges in specialty (drug business) eclipse the medium-term outlook as the ramp up has been slow even as competition is intensifying," Edelweiss Securities Ltd said in a note.

Business in India, on the other hand, is only tracking industry trends. Adjusted revenues last financial year are up 12%, not significantly better than the 10% growth clocked by the industry.

Of course, the current fiscal revenue growth guidance of low to mid-teens indicate an incremental improvement from 10% sales growth in FY19. But as analysts at Edelweiss pointed out, the guidance would amount to single-digit growth if one excluded the one-off impacts in the base year (FY19).

Thankfully, much of the scepticism is factored in the stock price. It lost 17% in the past year as corporate governance and related party issues riled investors. At current valuation of 15-16 times FY21 earnings estimates, the stock trades at a notable discount to its peers. While this should limit the downside, much depends on the business recovery and how the company resolves governance issues.

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