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Sun Pharma tempers sales growth expectations

LiveMint logoLiveMint 29-05-2014 Ravi Ananthanarayanan

About a year ago, Sun Pharmaceutical Industries Ltd issued a sales growth guidance of 18%-20% for 2013-14. As the year progressed, it upped this guidance all the way to 29%. Its actual growth for the year was 42% but this also includes the effect of currency changes. In 2013-14, Sun Pharma’s figures show the dollar to rupee rate rising by 11.1%.

Sun Pharma’s 2014-15 sales growth guidance will again present a dilemma to shareholders. It expects sales to grow by 13%-15%, which is considerably lower than even its original guidance. The company cites a high base effect and the risk of increased competition in some products. Both factors have merit. Also, in the current fiscal year there could be a headwind for an earnings surprise if the rupee strengthen.

Graphic: Naveen Kumar Saini/MintSun Pharma’s reputation is such that investors are likely to pencil in higher sales growth. The focus will shift to the completion of the proposed merger with Ranbaxy Laboratories Ltd. They will also watch for news on integration and how soon the merger’s intended benefits could reflect in earnings growth.

Sun Pharma’s quarterly sales have risen by 32% to `4,043.6 crore. This was lower than the Street’s estimate of 36%-40% but in line with the company’s estimate. Domestic sales growth remained healthy, up by 21% over the year-ago period.

Formulation sales in the US rose by 39%, but declined sequentially. The company had said after the previous quarter’s results that US sales could get affected by a few factors. It cited the end of exclusivity period sales of diabetes drug Repaglinide and possible price erosion in some products as factors. Slower sales growth in its “Rest of the world” cluster also pulled down overall sales growth.

But Sun Pharma’s operating profit margins continue to remain in good shape, rising by 3 percentage points over the year ago period to 44%, though sequentially it declined by 2%. Though its net profit rose by 57% to `1,587 crore, this growth was aided by a sharp jump in other income and decline in tax provisions. The 41% growth in operating profit is more representative of its earnings growth from operations.

After a good year, investors will count on the company’s ability to surprise on its conservative guidance, as it has done in the past. Otherwise, the Ranbaxy merger completion is what will engage their attention. There is one external risk they should be cautious about. Mint had recently reported that the US Food and Drug (FDA) Administration could be widening its inspection to other plants of the company. The outcome may be uneventful but if it isn’t, then it could upset all calculations.

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