Dr Reddy's or Ranbaxy: Which one should you buy?

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Dr Reddy's or Ranbaxy: Which one should you buy?

The Nifty ended the day on a flat note. However, pharma stocks held onto their gains despite sell-off. The BSE Healthcare index clocked an all-time high of 4991.53. Check Sanju Verma's top picks in th pharma space.

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Even as Indian equity markets trade in a ranged manner, stocks of pharmaceutical companies are on a roll. Several pharma stocks are at or close to their 52-week highs and BSE Healthcare Index clocked an all-time high of 4,991.53 on Thursday. The index's all-time low was 985.33 way back in the year 2001. The index has gained 100% from its 52-week low of 2,490.

See how pharmaceutical stocks performed on Wednesday

In that, which is the best stock to look at? Should you consider Dr Reddy's over Ranbaxy or leader Sun Pharma over underdog Glenmark. In an interview to CNBC-TV18's Sanju Verma, CEO - Institutional Business of Proactive Universal Group, spoke about various stocks and which holds the edge for the investor.

She also spoke on what attributes one should look for while buying pharma stocks.

Excerpts from an interview.

Within the pharmaceutical space, you have to differentiate between the generic companies and the so-called contract research and manufacturing services (CRAMS) companies. The CRAMS business model clearly has failed to deliver - Glenmark being a case in point.

If you look at the September quarter or even the June quarter, the numbers for Glenmark , or Divi's , have disappointed. Even in case of Jubilant Organosys , whose share prices saw a stupendous run-up, it was more to do with positive noises and guidances from the management rather than positive developments on the milestone payment part of the business.

While CRAMS was a great concept to put your money on one year back, at this point in time, I will stick to the basics and look at a company, which is doing well within the generic space. And Dr Reddy's steals the show there.

There has been a lot of noise that Ranbaxy is going to see a bit of boost-up to the bottomline to the tune of USD 80 million because of its exclusivity with respect to Valtrex.

I think that has been factored in into its share price and given that there have hardly been any earnings for Ranbaxy in the last couple of quarters barring forex gains, which resulted in the Rs 110 crore odd profit that they made in September, the best way to compare Ranbaxy and Dr Reddy's would be on an enterprise value (EV) to sales basis.

Why would I want to pay three times EV to sales - the best way of evaluating a company like Ranbaxy - on FY11 estimates when I can buy a Dr Reddy's for 30% earnings growth, better operating metrics just two times EV to sales.

So be it price to earnings, be it EV to sales, be it various operational metrics like earnings growth, sales growth, Dr Reddy's clearly stands out and then second down the rung, I would perhaps look at Lupin , which I think is panning out into a very interesting story with 20% plus growth in sales, 40% plus growth in profits. The accumulative abbreviated new drug application (ANDA) basket of 98 filings has seen 35 cleared by the US Food and Drug Administration (FDA).

So it would be, in that order, Dr Reddy's, Lupin and maybe Sun Pharma . I think Sun Pharma's results were clearly surprising on the positive for the September quarter. So even though I do not like the CRAMS model, if I have to make one exception and pick something, it would be Sun Pharma though there is a lot happening there with respect to Templeton having decided to support Sun [in its takeover attempt of Taro].

In that battle, if Sun manages to get additional stake in Taro at the market price of USD 9 instead of the open offer price of USD 7.75 - even as legally it cannot bid at more than USD 7.75 - and if there is an exception to the rule and it is allowed to bid at market price, and it manages to get additional voting rights, it would be a trigger for the stock price.

Sun already has an economic interest of 36% in Taro. However, even Taro's results were nothing great though at the end of the day, it did revenues of USD 93 million odd in a very trying year.