Kotak Securities Retains ADD Rating On This Pharma Stock, Target Price Rs 1,120, Sees Strong Upside

Stock Overview

Sun Pharma's stock on NSE is currently trading at Rs 992.35/share, around 0.50% up from its previous close. The stock recorded its 52-week high level at Rs 1,070.95 on 2 November 2022 and its 52-week low level at Rs 745.30 on 15 December 2021, respectively.

The stock fell by 4.18% in 1 the last week, whereas, in the last 1 month, it has fallen 2.29%. In the past 3 months, it has given 11.26% positive returns. Over a year it gave 29.86% positive returns. On long-term investments of 3 years, it has given 125.46% multibagger returns and in 5 years it has given 91.61% positive returns.

Halol’s import alert will disturb the new-found equilibrium in Sun’s ex-Taro US generics business

Sun's ex-Taro US generics sales had stabilized over the past few quarters, and Halol's import alert disturbs the new-found equilibrium. Despite its declining importance from a US generics standpoint, Halol is one of Sun's largest facilities and is the source of multiple dosage forms such as injectables, including oncology injectables, opthalmics, nasal sprays and hormones. From an 8-9% contribution prior to the warning letter in December 2015, Halol's US sales contribution has dropped to ~3% of Sun's consolidated revenues in FY2022. Halol has been under an OAI since March 2020, and we were not baking in any new approvals from Halol in our FY2023-25E estimates. After the import alert, Sun will not be able to supply drugs from Halol to the US, except 14 molecules, which have been excluded by the US FDA from the import alert, subject to certain conditions.

Worst case impact of 7% on annual EPS; we do not factor in a resolution at least until FY2025

Including the 14 exempt molecules, US sales from Halol contributed ~3% of Sun's FY2022 sales. We are awaiting details of the 14 molecules excluded from the import alert. Had these molecules not been exempted, we estimate that the impact of the import alert on Sun's FY2024 EBITDA and EPS would have been 4-5% and 6-7%, respectively. These estimates assume a marginal increase in remediation costs as well. With the exemption of the 14 products from the import alert, the net impact would be lower. In our base case, we do not factor in a resolution of the import alert at least until FY2025.

Stays on course; retain ADD with lower FV of Rs1,120

According to the brokerage, in the absence of any details, we have assumed 50% of Halol's US sales come from the 14 molecules exempted from the import alert. "Accordingly, we have reduced Sun's FY2023-25E EPS by 1-3% and lower its FV to Rs1,120 (Rs 1,1,50 earlier). On a positive note, we believe Sun's specialty business is close to breakeven; as sales scale up further, the medium-term margin outlook is sanguine," the brokerage has said.

The brokerage added, "Key risks to our positive view on Sun are increased competitive intensity in specialty and higher-than-expected increase in R&D spends. We have also not factored in any further adverse escalation of the recent Mohali OAI in our estimates."

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