Home >Markets >Mark To Market >Sun Pharma sails through Q1, but the stock may be outpacing profit growth

Investors can’t get enough of pharma stocks these days. That seems to be the reason that Sun Pharmaceutical Industries Ltd’s stock was up about 5% on Friday. Otherwise, there are no major positive surprises or triggers in the Q1 numbers, with the June quarter results largely in line with what the Street was expecting.

Sun Pharmaceutical’s revenues fell 9.6% year-on-year in the first quarter. Global growth across many of its markets was sharply lower. A drop of 33.5% y-o-y in the US revenue is sharp, considering that it did well in Q4. The covid-19 impact on this segment is evident going by the slower sales on the specialty portfolio and Taro.

To an extent, the slower growth rate was also because of a higher base last year from one-time opportunities. Some of the slowdown is also being attributed to the marginal price erosion in the US. Sun Pharma’s arm Taro points to the sluggish environment in the US with sales showing a yearly drop of 27%.

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Revenue growth from emerging markets and the rest of the world segments fell sizeably over last year, which is a disappointment. One saving grace is a marginal increase in the India business. Revenues improved 3% y-o-y.

Sales had slumped in April and May in the domestic pharma market. However, Sun Pharma’s domestic arm was able to launch new products, which aided growth.

The company’s active pharmaceutical ingredient (API) segment is proving resilience, with growth of about 20% y-o-y. Even so, the contribution of the API business for captive consumption is rising.

The company increased research and development expenses to 5.6% of revenue in Q1, from 5.1% in the year-ago period. Some of that will benefit the US drug launch pipeline. Sun Pharma has about 95 abbreviated new drug applications awaiting approval. In Q1, the company received approvals for eight drugs in the US.

Meanwhile, Sun’s Ebitda margins improved marginally. “Sun Pharma’s operating margin improvement was in line with what others have reported and is likely because of a favourable foreign exchange rate and lower marketing spend in branded markets," said Kunal Dhamesha, pharma analyst, Systematix Securities Ltd.

Even so, the stock’s recent run-up of about 23% since the beginning of the year has been sharp. An increase in earnings in FY22 is expected, but may not be enough to justify valuations. The stock trades at a PE of 23 times FY22 expected earnings.

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