Brokerages have cut the company's FY16 earnings estimates between 16% and 29% with target prices too coming down to the Rs 700-800 band
Steep downward revisions in earnings by brokerages following the profit warning for FY16 by the Sun Pharma management saw the stock lose over 14 per cent in trade on Tuesday to Rs 815 levels. Brokerages have cut the company's FY16 earnings estimates between 16 per cent and 29 per cent with target prices too coming down to the Rs 700-800 band.
The company had not disclosed the FY16 guidance during the March'15 quarter results as it needed more time to ascertain the full impact of the integration costs. Interestingly, the March quarter results also disappointed the street due to high integration costs relating to the Ranbaxy merger, which the market had not anticipated.
The guidance of flat to lower consolidated revenues year-on-year for FY16 is on account of supply constraints at Halol plant, pricing pressures in the US market and due to the company's decision to part with business segments, products, geographies which are low margin and offer no long-term strategic benefits such as the tender business.
What has caught investors by surprise is that Halol plant contributes an estimated 20-25 per cent of total sales and the revenue guidance means that other businesses too are likely to underperform. The guidance also includes benefits from the launch of Gleevec (blood cancer drug) in the US market early next year. The company has however indicated that it will grow at a sustained pace starting FY17.
The pressure on the company's profits is on account of higher research and development costs (R&D), remediation measures and integration costs. The higher R&D expenses is due to MK-3222 trials as well as for increasing the marketing efforts for opthalmic and OTC segments in the US. The MK-3222, which is licenced from Merck, is in phase III clinical trials and is used for treatment of chronic plaque psoriasis, a skin ailment.
The management indicated that the integration costs would be a one-off and not recurring in nature. The company however is confident of contribution of Ranbaxy business to its goal of outperforming industry growth rates from the next fiscal. While the near term is likely to be difficult, the company has reiterated its faith in the acquisition and has increased the target of $250 million synergies in the next three years post integration by 15-20 per cent.
The key benefits are likely to come from sourcing of products at lower costs and through sales synergies. The Sun management said that the remedial action at Ranbaxy's plants in Mohali, Dewas, Poanta Sahib and Taonsa facilities is on track and the company would like to expedite the resolution of at least one which is most likely Mohali, the newest of the four facilities.
But, given the near-term pressure on sales and profits, expect the stock to remain range-bound going ahead.
