Sun Pharma gets back above Rs1,000 after 7 long years

It has been a long hard struggle for the stock of Sun Pharma, which first fell into a bear market trap back in early 2015. Ironically, that was the time the stock dipped below the Rs1,000 mark and has consistently stayed below the market ever since. Even in the post COVID scenario when pharma stocks got a big boost, Sun Pharma share price did see a rally but did not successfully breach the Rs1,000 mark. Now, after a long tap of 7 years, the stock of Sun Pharma has once again broken past the Rs1,000 mark. The problems for Sun Pharma began with the acquisition of Ranbaxy and the pricing challenge in generics 8 years ago.

On the 27th of October, the stock of Sun Pharmaceuticals Industries finally rallied beyond the Rs1,000 mark to touch a level of Rs1,013 per share. This marks a multi-year high for the stock since the last time the stock had traded above Rs1,000 was way back in March 2015. Over the last few quarters, the growth numbers have been steady despite occasional hiccups like the recent Taro write-offs. However, the company appears to have put the ghosts of the Ranbaxy deal behind and moved on. Brokers tracking the stock have also started to get more favourable inclined to re-rate this stock positively. Here is a gist.
 

Sun Pharma is scheduled to announce its earnings for the second quarter ended September 2022 (Q2FY23) on Tuesday the 01st of November 2022. Most of the brokers continue to remain positive on the company due to some of the recent developments. For instance, the company has been deriving the benefits of operating leverage on a consistent basis. In addition, it has also consistently scaled up the specialty business, which is also the higher margin business as compared to pure generics. All these are likely to work in favour of a re-rating of the profitability of the company as well as its valuations in the stock market.

For the brokerage house, BNP Paribas, Sun Pharma continues to be the primary pick in the pharma and healthcare space. While the brokerage continues to like the hospital stocks due to gradual improvement in hospital occupancy, they are sceptical about the diagnostics business due to the high base of COVID related businesses. For the pharma business as a whole, BNP Paribas Research expects the top line to growth of 6% yoy and a bottom line contraction of 11% amid supply chain constraints. However, the brokerage does expect Sun Pharma to outperform these numbers within the pharma space, positioning as a top pick.

While the US business of Sun Pharma is expected to be robust, the EBITDA margins of the company are likely to sustain above 25%. This is on the back of a rapid ramp-up of specialty revenues in the US. Of course, the brokerage has also pointed to the rather substantial and far reaching digital initiatives of the company but it remains to be seen if it really translates into tangible benefits to the company. Some of the challenges for Sun Pharma are likely to remain like the pricing pressures in US generics and supply chain disruptions. However, the brokerage is seriously betting on a sustained domestic recovery to benefit Sun Pharma.

One factor that is likely to positively impact the stock price in the coming days is the currency depreciation, which normally favours the export oriented companies. In addition, Sun Pharma will also have favourable tailwinds like the fall in raw material prices, low crude prices and correction in shipping prices. All these are likely to boost the revenue growth and also improve gross margins. While the quarterly number of Sun Pharma will be keenly awaited, one thing is certain that it has sufficient tailwinds in the coming days. The stock crossing Rs1,000 after a gap of over 7 years, is a reflection of just that.