CLSA picks Sun Pharma over Lupin

The pharma companies had a great run in the first half of this year and are most likely to continue further. The strong bullish sentiment has led to a rally of 61 percent for the Nifty Pharma index from March lows. As competition increases further among pharma companies, CLSA has placed its bet on Sun Pharma as opposed to Lupin in its recent research report.

The global brokerage clearly said that it prefers India’s largest pharmaceutical company Sun Pharma over Lupin given more predictable earnings and valuation discounts.

Despite Sun Pharma reporting a slip in its consolidated net profit while Lupin’s profit rising, CLSA placed its bet on the former.

In its March quarter earnings, Sun Pharma reported a decline of 37 percent year-on-year (YoY) in its consolidated profit to Rs 399.8 crore after factoring in the one-time loss of Rs 260.6 crore, which included Rs 104.28 crore to settle central excise refund claims case, and Rs 156.35 crore to resolve the sales, marketing and promotion of two products (Levulan and Blu-u) with the US Department of Justice.

Meanwhile, Lupin’s consolidated net profit rose 34.55 percent to Rs 389.63 crore during the same March quarter.

Had it not been for the one-time litigation cost, Sun Pharma would have reported a bottom-line similar to Lupin’s.

In terms of revenue comparison, Sun Pharma’s income from operations during the quarter rose 14.3 percent YoY to Rs 8,184.9 crore while Lupin reported a 0.4 percent slip in its topline to Rs 3,791 crore.

Sun Pharma also faced pressures in other income and total expenses given higher employee costs and tax payments for Q4FY20, which affected its operating margin.

Despite all of the above-mentioned factors, CLSA remains bullish on Sun Pharma due to its estimated earnings in future and valuations.

Comparing the two, the brokerage said that both companies have many similarities. It noted, “Both derive two-third revenue from the US and India and are major players in their respective product categories. Peculiarly, the capital allocation for both has been towards building a differentiated product portfolio, with the US as an anchor market.”

“With all key pipeline products launched, we believe Sun’s operational outlook is relatively more predictable than Lupin which needs to overcome manufacturing and execution challenges,” it added further.

Valuation-wise, the brokerage said, “At 22x/19x FY21/22CL P/E (price-to-earnings ratio), Sun is trading at a huge 25 percent discount to Lupin despite its more predictable earnings trajectory. Therefore, we reiterate ‘BUY’ on Sun and ‘SELL’ on Lupin.​” – CNBC TV 18