Monday, May 18, 2015

Sun Pharmaceuticals: MFs' most sought after stock in April

Dilip Shanghvi-owned Sun Pharmaceutical is in focus among India's fund managers. They have zeroed in on the company's shares, having more than doubled their holdings in the pharma major by pumping in as much as Rs 2,534 crore.

In April, fund managers added 27 million new shares of Sun Pharma in their portfolios, taking the total number of shares held to 47.18 million, up from 20.18 million the previous month. This made Sun Pharma the most sought after stock during the month.

Equity schemes like Axis Long Term Equity Fund, Reliance Pharma Fund, UTI Opportunities Fund, Birla Sun Life Frontline Equity Fund and SBI Pharma Fund have the largest quantum of investments in Sun Pharmaceutical with shares held ranging between 1.4 million to 2.8 million.

Late last month when minority shareholder Daiichi Sankyo offloaded its entire 8.93 per cent stake, counter of Sun Pharmaceutical fell over 8 per cent. The increased supply of 214 million shares saw the stock come under pressure. Moreover, the entire month witnessed a steep volatility for the counter as it touched a high of Rs 1,200 and a low of Rs 913 as well. These dips were taken as good entry points by fund managers and they did not delay in picking the cheap shares.

"A dip of nearly 25 per cent in the stock in a short span of time for Sun Pharmaceutical was a great opportunity. I understand that the company may see headwinds when it comes to integration with Ranbaxy. But we do not invest from a short-term perspective. I expect this investment to make reasonable return," said an equity head of a large fund house who wished not to be named as the query was stock-specific. He further added that compared with the sector's valuation, the company was trading at much lower valuation and hence could not be missed.

The Sun Pharma management has indicated they will deliver synergies of $250 million by 2018 through various operational efficiencies. The major hurdles are on account of Ranbaxy's key manufacturing facilities in the country which cannot cater to the US market. Sun will look at monetising some of the recent ANDA (abbreviated new drug applications) filings of Ranbaxy from the latter's Ohm facility in the US. This is the only facility that is not under a consent decree, the term for an agreement to make various changes after violation of good manufacturing practices. Further, a complete resolution of the US drug regulator, the FDA's observations on Sun's Halol (in Gujarat) facility is a key monitorable.

The extent of the challenges the company faces will probably be known over the next three to four quarters. If acquisition and production issues in the recent large acquisitions such as of Taro (legal) and Caraco Pharma (regulatory issues on manufacturing) and the time taken to solve these are anything to go by, it will take a couple of years for things to settle.

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