Elara's take on top pharma stocks: Ranbaxy, DRL, Cipla

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Ranbaxy Labs BSE | NSE 30/05/12 Are Mutual Funds betting on Ranbaxy Labs? Other Stocks in this news Dr Reddys Laboratories | Cipla | Piramal Life Sciences |

Surajit Pal, Pharma Analyst at Elara Capital, in an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, spoke about his reading of the pharma sector and his outlook on a few stocks.

Below is a verbatim transcript of the interview. Also watch the accompanying video.

Q: Is that the house view at Elara that perhaps we are entering a down cycle, pharmaceutical could be the relative out-performer?

A: For quite sometime, we are underweight in pharmaceutical sector. We have been telling investors that the pharma space is not the kind of space which you can compare with 2010 market downturn.

As far as valuation is concerned, they are definitely at very high end of the range. If anything happens from hereon and they are not able to meet the expectation of the investors, then the downfall is quite eminent in pharma sector particularly in large and medium.

Q: What have you made of the USFDA penalty news on Ranbaxy ? Do you have any clarity on whether it would be a USD 1 billion or USD 300 million? What is your call on the stock at this point?

A: My recommendation in the counter is to sell or reduce. On base business, the company's valuation should come around 300-305 and we can add another Rs 50-60 for one time income for one time P/E.

If we add anything else other than that, it will be extremely overvaluation at this point of time. As far as penalty is concerned, if the media speculation of USD 1 billion is right, then it will be a bit off exaggeration of what they have done.

The yearly run rate of their income given since 2000-2001, their highest revenue from US market is USD 398 million till date. USD 1 billion is too much for what they have done as of now.

Q: Dr Reddys Laboratories (DRL) was down and out yesterday. The stock has seen a goodish amount of movement in the last three-four months. It has moved all the way up from 1,540 level. It is now trading somewhere around Rs 1,680 mark including yesterday's dip. How would you approach DRL from hereon? There was news that many more Para IV opportunities are expected in FY12. Do you see a lot more scope on the upside?

A: The Company has positive prospect, not for these or last year. The company has been plagued by the delay in their Para IV products. Some Para IV products have limited competitions. Those products haven't got any approval.

There is a delay for unspecified reasons which even their partner could not know why the approval has still not come though. The USFDA visit was completed successfully. We expect a lot of approval in Para IV and limited competition drugs by FY12-13.

Too much of delay could take away the attractiveness of the drug or the delay into entry. The two-three products, which they launched in last year, were delayed by two-three months. It would create a lot of hangover in the counter. This is the reason why might not see the potential utilisation in the counter.

At this point in time, the company is pretty much not in a mood to go up. The simple reason is that the hangover will come in from German business. This year, they will be tendering new provision for the valuation of their product. This will be additional negative news for the company. It could not run up from the current level and would go up to maximum 1630.

Q: What are your views on Cipla ?

A: Cipla is a stock which has recent run-up till 370-380. There is a rumour that the company will be sold to foreign strategic investor. Other than that as far as their fundamental run up is concerned, it has shown some trigger as a result of its downside is limited.

It has been showing the kind of growth which will be maintained going forward. As far as export market is concerned, their tie-up with their partners will start getting reflected in numbers from second half of this year.

The inhaler business would see some critical revenues start coming in by the last quarter of this fiscal. This way one can start investing over it. Going by market volatility, these stocks will provide limited downside than their peers in pharmaceuticals.

Q: Would you see any potential in Piramal Lifesciences or is it avoided?

A: Piramal doesn't have any strong visibility by the management. Given the kind of business or product like healthcare or life sciences they have, I don't see much of a volume to come over there. The company has to clear a lot of things and the uncertainty about money they have already cash in hand. It is not at all suggested for any investor to enter the counter.

Q: Do you have exposures to any of these stocks?

A: None.