Why Are Insiders Bearish About Sun Pharmaceutical Industries Limited’s (NSE:SUNPHARMA) Stock?

Sun Pharmaceutical Industries Limited, a generic pharmaceutical company, manufactures and sells pharmaceutical formulations and active pharmaceutical ingredients (APIs) in India and internationally. Sun Pharmaceutical Industries is one of India’s large-cap stocks that saw some insider selling over the past three months, with insiders divesting from 20.00k shares during this period. A well-known argument is that insiders divesting from their own companies’ shares sends a pessimistic signal. A research published in The MIT Press (1998) concluded that stocks following insider selling fell 2.7% compared to the market. However, it may not be sufficient to base your investment decision merely on these signals. I will be analysing whether these selling activities are supported by favourable future outlook and recent share price volatility. View out our latest analysis for Sun Pharmaceutical Industries

Who Are The Insiders?

NSEI:SUNPHARMA Insider_trading July 12th 18
NSEI:SUNPHARMA Insider_trading July 12th 18
There were more Sun Pharmaceutical Industries insiders that have sold shares than those that have bought. In total, individual insiders own over 301.35 million shares in the business, which makes up around 12.56% of total shares outstanding. The entity that sold on the open market in the last three months was Pratham Investments. Although this is an institutional investor, rather than a company executive or board member, the insights gained from direct access to management as a large investor would make it more well-informed than the average retail investor. In this specific instance, I would classify this investor as a company insider.

Is Future Growth Outlook As Bearish?

NSEI:SUNPHARMA Future Profit July 12th 18
NSEI:SUNPHARMA Future Profit July 12th 18
At first glance, analysts’ earnings expectations of 194.24% over the next three years illustrates an exceptional outlook for the business. However, this is inconsistent with the signal company insiders are sending with their net selling activity. Delving deeper into the line items, Sun Pharmaceutical Industries is believed to experience a strong double-digit revenue growth next year, which appears to flow through to larger earnings growth expectations. This could indicate significant cost-cutting activities or a high degree of economies of scale which may have a compounding impact in the future. Insider net selling activity is counter to what we’d expect given a significantly positive earnings outlook, indicating they may know something the market does not. Insiders could perceive the high growth as unsustainable or that it has been excessively factored into the current share price.

Did Stock Price Volatility Instigate Selling?

Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. Volatility provides an opportunity to trade on market inefficiencies when the stock is under-priced compared to the stock’s intrinsic value. In the past three months, Sun Pharmaceutical Industries’s share price reached a high of ₹579.3 and a low of ₹443.75. This suggests some volatility with a share price change of of 30.55%. Perhaps not a significant enough movement to warrant transactions, thus motivation may be a result of their belief in the company in the future or simply personal needs.

Next Steps:

Sun Pharmaceutical Industries’s insiders’ meaningful divestments tells us that their shares have recently fallen out of favour, however, this is rather cautious relative to analysts’ earnings expectation, whereas a highly volatile share price could be the driver to sell. But we must also be aware that insiders divesting may not actually be based their views on the company’s outlook. Furthermore, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. there are two relevant factors you should look at:

  1. Financial Health: Does Sun Pharmaceutical Industries have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Other High Quality Alternatives : Are there other high quality stocks you could be holding instead of Sun Pharmaceutical Industries? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.