Shares of Sun Pharmaceutical Industries slipped over 6 percent on Wednesday despite strong earnings for the June 2019 quarter. India's largest drugmaker said its consolidated net profit rose 31 percent year-on-year (YoY) to Rs 1,387.5 crore on the back of lower research and development (R&D) expenses. Sun Pharma shares dived as much as 6.2 percent intraday to Rs 412 per share on the NSE. At 10.23 AM, Sun Pharma's stock price was trading lower by 5.22 percent to Rs 416.30 per share.
Motilal Oswal said, "Gross margin shrank 30bp YoY (-370bp QoQ) to 70.2 percent, mainly due to the change in product mix and distribution transition in India. However, EBITDA margin expanded 70bp YoY to 22 percent." The brokerage raised Sun Pharma's FY20/21 EPS estimate by 7 percent to factor in improved growth in the domestic formulation business and lower finance cost.
Revenue from operations surged 16 percent YoY to Rs 8,374.4 crore. R&D expenses were 5.1 percent of revenues as against 7 percent of revenues in the June quarter last year.
The company's sales in the US rose 12 percent YoY on the back of increased spending on branding and promotion in the country. The drug giant in its media release also mentioned that it has commenced research on developing an early-stage innovation pipeline for its specialty business.
Jefferies believes that risk-reward is favourable in Sun Pharma, which is trading at 16x FY21 PE, a 20 percent discount to peers. "While FY20 margin improvement is lower than expected due to specialty investment, we remain positive on the specialty business. We expect base business to also see steady recovery in FY20/21. Retain Buy with TP of Rs 520."