Sun Pharma gains 3%; hits new high on UBS 'Buy' rating, sees more upside

UBS has a target price of Rs 2,450 on Sun Pharma and expects it to record the highest growth in the near-term and the medium-term via a ramp-up of the specialty drug pipelline.

Shares of Sun Pharmaceutical Industries hit a new high of Rs 1,952, as they rallied 3 per cent on the BSE in Friday’s intra-day trade in an otherwise subdued market. The rally in the stock came after UBS gave a ‘Buy’ rating on the stock with a target price of Rs 2,450 per share. 

The global brokerage firm expects Sun Pharma to record its highest growth in the near-term (operating leverage benefits from its US specialty portfolio and margin expansion at its subsidiary, Taro), and the medium-term via a ramp-up of the specialty drug pipeline.

Meanwhile, Sun Pharma’s new data demonstrates improved hair satisfaction in more than 5 per cent of patients suffering with severe alopecia areata taking deuruxolitinib and clinically meaningful improvements in depression and anxiety from baseline to Week 24.

Studies also confirmed dose optimisation, with results demonstrating greater response with 8 mg tablets twice-daily as compared to higher, once daily dosing, the company said in an exchange filing.

 

In the past one month, Sun Pharma has outperformed the market and rallied nearly 10 per cent, as compared to 5 per cent rise in the BSE Sensex. The stock has bounced back 42 per cent from its June month low of Rs 1,376.75 on the BSE.

According to UBS, consensus underestimates the company's operating leverage benefits of its specialty pipeline in the US and also the significant margin expansion at fully owned Taro Pharmaceutical. The brokerage firm expects specialty margins to double over the next two years and for Taro's margins to triple.

Analysts at UBS expect the company's specialty portfolio revenues to double over the next four years to over $2 billion. Operating leverage benefits are high as the doubling of revenue does not require a meaningful addition in the sales force. 

For Taro, UBS expects it to make a $80-100 million addition to Ebitda, driven either by the turnaround or divestment of loss-making product, ProActiv, and sharp reduction in high R&D of $60 million at Taro.

Consolidated earnings before interest, tax, depreciation and amortisation (Ebitda) margins should expand 650bp over the next four years, resulting in a high consolidated EPS compound annual growth rate (CAGR) of 19 per cent over four years (on headline basis and 25 per cent EPS CAGR over FY25-27E for the core business).

This growth trajectory is the highest among large-cap peers and analysts expect Sun Pharma to trade at a higher valuation than peers in the context of slowing growth for others.

“Our price target implies a FY27E PE of 38x, higher than the historical range. However, in the context of slowing growth for Indian peers, significant margin expansion even beyond FY27E (only half of the 650bp margin is factored in up to FY27E) and the potential to strengthen the specialty pipeline with new molecules (based on ample cash and FCF), we are comfortable valuing Sun Pharma at a premium to peers. The near-term catalyst is the launch of Deuruxolitinib in the next,” UBS said.

Sun Pharma’s US generics business has remained a laggard versus peers, plagued by manufacturing quality issues at many facilities. Analysts at Elara Securities feel that it could be three to four quarters before all the warning letters/import alerts by US FDA are lifted and the business gets on a growth path.

Integration of Taro could improve profitability in the business too, the brokerage firm had said in its Q1 result update.

Motilal Oswal Financial Services said they remain positive on Sun Pharma on the back of a rising contribution from specialty products through commercial traction, progress on development pipeline, and outperformance versus the industry in branded generics segment. The brokerage firm has a ‘Buy’ rating on the stock with a target price of Rs 1,980 per share.