Stock corner: ‘Buy’ on Sun Pharma with a target price of Rs 525

By Nomura AEJ 

We have assessed the Form 483 observations for the Halol site issued after the inspection of the plant was held during December 3-13, 2019.  The observations highlight deficiencies with respect to investigation into OOS test results, robustness of the data captured in the environment monitoring systems, robustness and appropriateness of sample collection for microbiological testing, location of sampling for particle count, visual inspection for defects by analysts and assessment of cause for alarms in the manufacturing unit.

We think the observations around lack of appropriate process to analyse microbiological contamination and particulate matter, and concerns on integrity of data captured in EMS are serious and would require a comprehensive response from the company. There is risk of OAI classification, which can delay new product approvals.

However, the sensitivity of Halol to earnings is lower currently compared to that in December 2015 when Halol had received a warning letter. Expectations from upside from generic launches are limited. Since the clearance of the Halol warning letter in June 2018, Sun Pharma ex-Taro has received 34 approvals, of which only 7 are from Halol.

Sun Pharma now has an additional injectable site at Baska and, hence, to that extent, its dependence on Halol for injectable launches might be lower, in our view. As per our estimates, Halol contributes ~15% to US revenues currently. Scaling up of specialty sales is the key earnings driver, in our assessment. We have a Buy rating with a target price of INR525. We value SUNP at 20xone-year forward EPS and our TP is based on 20x Nov 2021F EPS of INR26.3.