Sun Pharma is doing great but US Arm Taro may be peaking

Drug major Sun Pharma, the most valuable pharmaceutical company in the country, remains an attractive investment opportunity in the sector despite signs that its highly successful US operations may have peaked. This is reflected in Sun's moderate guidance of 18-20% growth in revenues for the current fiscal.

The performance of the US business, the most critical part of Sun Pharma's operations, which contributes over half its consolidated revenues, has been boosted by favourable currency movement, supply of generic Lipodox at a time of shortage and its latest acquisitions Dusa and URL Pharma. However, a significant portion of the US business is accounted for by Sun's subsidiary Taro, which has started showing signs of peaking.

Taro, contributing one-third to Sun Pharma's consolidated revenues, has posted its first major sequential decline in revenue and margins in Q4 FY13 after the company increased prices in FY12. Taro's volumes have also fallen marginally. If the trend continues, it is likely to put pressure on Dusa and URL to increase their contribution to Sun Pharma's bottom line in the world's biggest pharmaceutical market.

Sun Pharma's domestic business, which contributes one-fourth of the company's business, has continued to outperform the industry, with the company maintaining its leadership in six key therapeutic areas. The recently notified new drug price control policy, which has the potential to bring down realisations of pharmaceutical companies operating in India, is likely to lower Sun's revenue by 40-50 crore in FY14, a much smaller hit compared with its competitors.

Sun PharmaBSE 6.85 % is among the most profitable drug companies in the world. Its stock is valued at 36 times its earnings for the past four quarters, compared with 20.8 times forCiplaBSE 0.37 %, 25.7 times for Lupin and 30.8 times for GSK Pharma.

Sun shares have gained 35% so far this year hitting a new high of 1,026 a day before the results. However, with most of the positives having been factored in, the stock is likely to consolidate at current levels till further positive development kicks in. An acquisition could be a trigger given that the company is armed with a cash pile of $1.3 billion (over 7,000 crore) and an enabling resolution to raise 8000 crore, in order to expand inorganically in its key markets.