Mumbai: Shares of Sun Pharmaceuticals Industries Ltd on Monday surged over 4% after foreign brokerage firm Morgan Stanley double upgraded the stock to overweight and increased its target price.

The stock was upgraded on expectation of a revival in the company’s earnings from fiscal 2021 onwards, driven by steady growth in base operations coupled with plateauing of current elevated cost structure, leading to positive operating leverage.

Shares of the company have risen as much as 4.12% so far today to hit a high of 424.50 on BSE. At 11.16 am, the scrip was traded at 416, up 2% from previous close.

Brokerage Morgan Stanley expects specialty ramp-up, manufacturing rationalization, cost control, Halol contribution, among other factors, to help improve margins for fiscal 2021.

The stock has been a big underperformer in the last two years, falling over 41% compared with gains of 31% in benchmark Sensex index. So far this year, the scrip has declined down 3%, while the Sensex has risen 7.5%. As a result, valuation has become reasonable, even based on Morgan Stanley's reduced estimates. Price earnings are now 22.3x for FY20 estimates and 15.8x for FY21 estimates.

"Sun's earnings and stock price are both at multi-year lows. We expect FY20 to be a transitional year, followed by a year of cost normalization and positive operating leverage. Specialty is a "free optionality." With this upgrade, Sun is our top pick," said Morgan Stanley in a 14 July note. The brokerage firm has raised its target price on the stock to 505 a share, up 27% from the earlier 398.15.

Globally aging population, pressure to contain costs, significant patent expiries, and new markets (such as Japan) will define global opportunities, said Morgan Stanley report.

Of the analysts covering the stock, 21 have a “buy" rating, 10 have a “hold" rating, while 12 have a “sell" rating, according to data from Bloomberg.

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