Sun Pharma - Stock correction overdone; outlook bright - BUY - Religare

SUNP has underperformed its large-cap peers (DRL, LPC) in the recent past (?5% in last 2 weeks) due to negative news flow on (a) an import alert on its Karkhadi (India) facility and (2) competitive pressures in Doxycycline (6% of PAT). We think the stock correction is overdone, noting robust earnings growth/reasonable valuations (trades 20% below historic avg.). We expect strong guidance post 4Q results (SUNP typically beats guidance) and likely earning upgrades (led by US biz) to drive upsides from hereon.

- Financial impact of import alert limited: The recent USFDA import alert on SUNP's Karkhadi Cephalosporin unit (oral solids) is a sentiment-negative for the stock. We expect <1% profit contribution from Karkhadi, and think SUNP's quality/regulatory capabilities (14 USFDA-approved units) should help it tide over this situation.

- Doxycycline moderation already factored in: We assume lower Doxycycline sales (US$ 70/US$ 40mn for FY15/FY16E) as low entry barriers likely invites new players. Hikma's recent guidance hence doesn't lead us to trim our earnings estimates. Doxycycline generates sales of US$ 12mn-14mn/month for SUNP currently. Reintroduction of products from URL's portfolio could result in a positive surprise.

- New competitor in Doxil at least a year away: With SUNP being the only supplier of Doxil post J&J's exit, its version becomes the reference-listed drug for BE (bioequivalence study). As such, potential new entrants (Azaya, TLC) would need to re-work their trial plans, causing further delays. We see no new competition in Doxil for at least a year even as J&J (innovator) likely resumes supplies after 2-3 qtrs, and build in Doxil sales of US$ 140mn/100mn for FY15/FY16E with high profit margins.

- Valuations reasonable post correction: SUNP trades at 18.4x 1-yr fwd. P/E (22-24x hist. avg) which is unjustified noting (a) sector-leading profitability/return ratios, (b) strong B/S (net cash: US$ 1.2bn+), and (c) an extensive US pipeline (131 pending ANDAs). Key triggers: (a) Annual sales guidance (May'14). (b) Niaspan/Yaz launch.

Source : Equity Bulls

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