Buy Dr Reddys at every dip; cautious on Cipla: IIFL

Analysing the first quarter pharma numbers, Bhavesh Gandhi, India Infoline told CNBC-TV18 Dr Reddy's posted stellar numbers and at Rs 4000 the stock is doing 22-23 times FY17 earnings and the year-on-year (Y-o-Y) growth for earnings should be in the range of about 17-18 percent, so the stock can be accumulated at every decline. With regards to Glenmark, he said given the numbers and the valuations the brokerage house would refrain from hiking the target price from the current Rs 1070.He is cautious on Cipla because the valuation upside is limited at current levels of Rs 700.Below is the transcript of Bhavesh Gandhi's interview with Sonia Shenoy & Latha Venkatesh on CNBC-TV18. Sonia: I have a lot of stocks to talk about but first up if you can give us your view on Dr. Reddy’s which is the biggest Nifty gainer today, would you advise investors or your clients to increase allocation post numbers?A: The numbers have been quite stellar for Dr. Reddy’s. If you remove the slight soft topline growth that had come below our estimate but then given the margin and the profit expansion, we do believe that this just looks a sort of the run-rate for the near-term but that said, the stock at just about Rs 4,000 is doing at about 22-23 times FY’17 earnings and from here on we believe the year-on-year (Y-o-Y) growth for earnings should be in the range of about 17-18 percent and given that scenario we believe the stock can be accumulated at every decline from here on.Latha: I wanted to know what you bought from the Glenmark Pharma management? I understand they have given an Earnings before interest, tax, depreciation and amortization (EBITDA) guidance of Rs 1,750 crore?A: Glenmark Pharma in terms of concall management appeared quite positive in terms of their US performance. They expect the US business to ramp up from Q2 onwards and they do expect about four or five approvals for the remainder of the year and given the approval number we believe those approvals could drive a meaningful traction to the topline. Apart from that obviously Latin America, Europe, India- Especially India and Latin America in local currency sales have been quite robust and in India obviously the domestic markets Glenmark has been doing about 1.5-1.7 times the domestic pharma market run-rate.Latha: So are you raising your target price from the current Rs 1,000?A: Given the numbers and the valuations, we don’t think we would raise our Rs 1,070 target price on the stock.Sonia: The other stock that has been dormant for many months but has not started moving is Cipla after it received that US Food and Drug Administration (FDA) approval for the inhaler drug, is this is a stock that you are recommending and if yes, what would the target price be?A: We remain cautious, we have been cautious on the stock for two or three quarters, and our stance does not change post the events. Broadly, we do believe that the earnings growth would be there about 30-35 percent earnings Compound annual growth rate (CAGR) which I believe would be the best among the four large cap pharma stocks. Having said that, at Rs 700 valuations upside seems to be limited.