Like Dishman, Alembic, Panacea Biotec: I-Sec

Excerpts from Bazaar 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 Nifty BSE | NSE 01/06/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Apollo Hospitals Enterprises | Cipla | Divis Laboratories | Dishman Pharmaceuticals & Chemicals | Fortis Healthcare | Glenmark Pharma | Matrix Laboratories | Panacea Biotec | Ranbaxy Laboratories | Shasun Pharmaceuticals | Suven Life Sciences | Sun Pharmaceutical Industries |

Rajesh Vora of I-Sec says that he will stay selective in pharma. He feels that Sun Pharma will do well going forward and believes that there is no fundamental behind recent spurt in Cipla . He is positive on midcap pharmas like Alembic , Dishman and Panacea Biotech .

Excerpts from CNBC-TV18's exclusive interview with Rajesh Vora:

Q: Could you put the pharma business into perspective? How does it stack against the valuations of some of the frontline pharma stocks?

A: The pharma sector, over the past few years, has seen a deflation in terms of prices, and fundamentals have worsened over a period of time.

However, the companies focused on building business and scaling up and yet achieving profitable growth, have done well.

Our message is to stay selective. Unlike 3-4 years ago, when every company benefitted on the huge cost advantage that India had. Now competition has increased dramatically and also the authorized generics in the US generics space and government related price cuts in the European markets, have made the fundamentals significantly inferior today than they were 3-4 years ago.

Q: Do niche or smaller players appear more attractive for the fleet-footed at this point of time? From the market perspective, largecaps have not been great wealth creators, but some stocks like Glenmark , or Divis Lab have created quite a bit of wealth. So is there a change in shift, which the market is spotting?

A: I wouldn't call it a change in shift, but a couple of them given their unstinted focus on doing what they are good at, have built a significantly superior business model. For eg. Glenmark has done so by emulating the bigger boys and doing well on the drug discovery they have moved up the value chain.

Other companies like Divis , who are more of outsourcing plays, have focused on what they are good at, rather than trying to do what the bigger boys are good at.

Therefore, focusing on your key strengths and working on scaling up the business is something that differentiates a successful company in any business and more so in pharma.

Focusing on businesses run by competent managers and focusing on their strength and scaling up rapidly and in a profitable manner is something that has done well. So, I wouldn't say there is a shift or something. Even in the large cap, Sun Pharma has done well over many years and going forward, we think it will do well with significant discipline on the operating side and strategic choice of business model to focus on managing the risk and have consistent growth year after year.

So the focus should be on management, on business model, which throws consistent, predictable, high margin growth over a longer period of time. Companies irrespective of market cap that focus on these issues, these parameters would continue to do well irrespective of ground level changes in the competitive scenario.

Q: What about Cipla, the stock got punished quite a bit after its quarterly numbers and now there seems to be all kinds of news flow about management changes but for the business itself?

A: The results were significantly below expectations of the Street and as a result, stock took a big tumble. There are no fundamental reasons behind the recent spurt but only speculative, given the succession issue at the company. A year ago, it was the talk of Teva and then Reliance and now again Reliance and few others.

It is very hard to say what will happen eventually, but obviously this is a company among the large cap, very efficiently run company which is clearly a potential target for M&A activity, going forward. However, we have no insight as to what will happen and when.

Q: Biocon made a big move four months ago, but now is off the radar and Matrix labs and how do you read any development that may come in thorugh the Mylan-MERC tie up?

A: MERC-Mylan combine puts them in the number three position after Teva and Sandoz in the global generic space. Hence,  Matrix Labs, given their India base and their understanding of chemistry, would benefit a lot from outsourcing out of US and Europe. MERC Germany is predominantly Europe based generic company and so depending on the level of outsourcing that Matrix Labs gets there, will be a benefit coming down to them. But the timeline and the size of the outsourcing would decide the upside that could come to Matrix.

Q: Which other midcap pharmaceutical stocks do you track? We spoke about Glenmark and Divis, last couple of days Shasun has made a nice move, any other interesting niche stories that you are spotting?

A: We like a couple of names. Alembic is one of them, which announced their numbers recently and also signed up a new delivery system deal with UCB for one of their products. Other than that, we like Dishman Pharma , which is again in a similar space as Divis and significantly undervalued relative to Divis. The other name that we find interesting is Panacea Biotech.

Q: What happens to Ranbaxy , which has been stuck in a range for as long as one can remember? When does business momentum begin to pick up once again?

A: It is a tough call, but for Ranbaxy , even though few of the approvals have started coming in, a 100% clarity and a 100% green signal from US FDA would do a world of good to that stock, so that is one big overhang on that stock. Apart from that, news relating to Para IV monetisation or authorised generic deals with one of the Para IV challenges would do a world of good to that company. Until then, acquisitions have been done in the past and growth is coming back, but there is nothing vastly exciting for the investor in general. Once, these issues get sorted out, the momentum could come back in the stock.

Q: Do you track allied services to this space like Apollo Hospital or Fortis HealthCare ?

A: We track Apollo Hospital, but not the others.

Q: Do you track Suven Life Sciences ?

A: We do keep a track of it, but do not actively cover it. I think with their Eli Lilly deal, they have come into the reckoning in terms of their potential to create value on the drug discovery services side. And if they were to pull-off one or two more deals, they would obviously go into a higher orbit, but it's a question of delivery and one has to wait and see.