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Sun Pharma plummets 15% after FY16 warning spurs downgrades

21 July, 2015 2:59 AM
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Shares of the country's largest pharmaceuticals firm by sales and market capitalization, Sun Pharma , fell about 15 percent in early trade Tuesday as analysts rushed to temper down their earnings expectations from the company after it warned last night its profit and revenue growth this year may be lower than estimates.

The Dilip Shanghvi-run company said yesterday its revenue in fiscal 2016 would be flat at best as it incurs further one-time costs to fix manufacturing problems at Ranbaxy Laboratories, which it bought last year.

The company also said that issues at its own Halol plant, which was served an observation notice from the US FDA, would take "some more time" to be remedied. It added that it had decided to shed some low-margin businesses that it believes don't hold long-term value.

The statement came as a surprise to some analysts while others said Sun's business may rebound sharply the following year onwards as the Ranbaxy integration is completed and issues at the firm's Halol plant and all four of Ranbaxy's plants are sorted out.

Between brokers Macquarie, Bank of America-Merrill Lynch, Morgan Stanley, Jefferies and Nomura, analysts downgraded their fiscal 2016 earnings forecast for Sun by 15 to 30 percent -- to bring them in line with company's expectations.

But they differed in their forecasts for fiscal 2017 (downgrades between 3 and 20 percent), depending on how long they believe the impact of yesterday's announcement to linger, which led each to hold out different targets for the stock price.

Jefferies and Macquarie believe shares will recover from the current Rs 800 levels before rising to their price targets of Rs 1,100 and Rs 1,000 respectively. Bank of America-Merrill Lynch has a price target of Rs 950 while Nomura said stay at Rs 792, close to current levels.

"We have been positive on Sun Pharma due to three key factors: strong product pipeline in US and EMs, significant synergy benefits from Ranbaxy (now upgraded by 15-20 percent) and upside from R&D pipeline including [psoriasis drug] MK-3222," Jefferies said in a note to clients.

But Nomura believed the abovementioned factors, such as MK222 and Ranbaxy synergy costs, themselves to risks to the company's outlook going forward.


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