Among large caps, Anmol Ganjoo likes Dr. Reddy‘s Labs, Lupin and Cipla. He picks Ipca and Torrent Pharma from the mid cap space.
In an interview to CNBC-TV18, Anmol Ganjoo, VP, JM Financial Institutional Securities shares his views on pharmaceutical sector and his preferred stocks going ahead.
According to him, there is incremental positive news in pharma space. He believes Lupin has been trading at fairly steep valuations and the stock may see upside due to Nexium generic. He’s bullish on Ipca Laboratories and is hoping that the US FDA issue will get resolved soon.
Below is verbatim transcript of the interview:
Q: Today is a down day for the healthcare index but overall we have seen a strong outperformance and all of them are now sitting at valuations that are close to 30 times FY16 price-to-earnings, at least for frontliners. Do you see further upside in terms of valuations?
A: It has never been our case that valuations will continue to expand forever but we have been proved wrong thus far. What has happened in the healthcare index is that there has been incremental positive news on the margins and there is a reason to believe that what you see in terms of estimates for some of these frontliners, which trade at 30 odd times one year forward and 26-27 times on FY17 earnings, might see an upgrade as far as the earnings are concerned.
While it still remains to be seen whether that market belief is correct or not but given the spectacular run we have seen in last three-four years, market for now seems to be giving benefit of doubt that some of these earnings upgrades predicated on specific bottom up drivers will come through especially for the frontliners.
Q: Do you track Wockhardt, because that's the one which has been re-rated the most, post the numbers. The numbers look good on face of it, but do you think the kind of re-rating we have seen is warranted and can further re-rate from here?
A: We do not track Wockhardt. However, it is fairly instructive to find out what has been going on that particular stock and I think lessons can have applications for some of the other stocks in our universe as well.
Wockhardt has been through pretty bad times from a regulatory standpoint. Most of its facilities have been immobilised because of the FDA issue.
There are initial but not confirmed signs of hope that these will get resolved and the market and the Wockhardt stock price seems to be pricing in a perfect resolution and company moving back to growth that was recorded in the past.
The lesson, therefore, from the regulatory resolution standpoint is that the time to buy these stocks are when some of the regulatory troubles and attendant news flow is at its peak because these things come back if you have had an import alert or if you have had a 483.
Companies, as they scale up their US game, do go through this transition and then eventually things revert and that is if companies are willing to up the game. So, if you spot a quality player going through some kind of a regulatory snag, if you are confident you should pack the management because you get stocks at fairly compelling valuations around those times.
Q: What about Ipca Labs because that's one of your top picks from the broader markets? There were some details about the observations that came out for Lupin’s Indore facility. What do you make of it and what’s your view on the stock?
A: Lupin trades at fairly steep valuations, for good reasons though. This is a company that has been delivering consistent 20-25 percent earnings growth, compound annual growth rate (CAGR) and has been growing at very high basis. So, we expect the multiple to sustain.
What you have seen in terms of recent price performance is predicated on the fact that because of first Ranbaxy and then Dr. Reddy’s withdrawing from the Nexium opportunity, they get an incremental upside on that.
The point I was alluding to earlier in terms of some of the earning estimates posing upside risks, I think this is a classic case of that where our FY16 number for Lupin is around 62. However, if Nexium traction is good and you see significant market share, there is an easy 5-6 percent upside to this number.
Also, with respect to Indore, that is completely a non-event because if we look at the 483 that has been issued, apparently from what has appeared in news print, there is no data integrity issue. There are two important events that have happened in that facility post the inspection.
One is that you have actually had an approval which means that the view that FDI seems to have taken is that while there might be some things they want the company to correct and there is nothing serious. There is one particular product, the filing of which Lupin has been allowed site transfer.
Both these events after the inspection mean that purely on a severity scale these are not material issues. The issue around 483 is pretty much par for the course for any pharma company.
What raises alarm bell is when you have data integrity issues and the potential of an escalation to an import alert. The evidence thus far suggests that there is no reason to build such a case as far as Lupin's Indore plant facility inspection is concerned.
Q: Is it a good time to buy Ipca Laboratories on hopes of a resolution of its US FDA facilities?
A: Yes, we have been saying this for a while and the stock has been building hope of a resolution. However, it is not that the resolution is going to happen tomorrow and they are going to start selling drugs into US fairly soon.
However, point to note is that from a US exposure standpoint in absolute terms, Ipca has very low exposure. It is around 8-9 percent. That is not to say that US is not an incrementally important market going forward but the hit to absolute numbers from the US non-starting remains fairly low.
Due to the problems in the Ratlam facility, there was negative operating leverage that had started developing and impacting numbers beyond the impact of the US. We think that is clearly behind the company.
While US final resolution might still take some time, there are other drivers in the business that will start picking up steam and you have had other markets like the institutional business which have also suffered as a result of the collateral damage of Ratlam undergoing severe quality remediation measures. That is behind the company and therefore, from a number standpoint the last quarter was clearly the trough in my view and things should start improving from hereon.
Q: What is your call on Sun Pharma and the research company SPARC where we have seen big gains and Sun Pharma now looks so expensive on face of it? Also, what about Aurobindo Pharma, which has been quite volatile?
A: Two out of the three stocks you spoke about SPARC and Aurobindo are clearly not in our covergae list. As far as Sun Pharma is concerned, that just exhibits the kind of optimism people are building into valuations at this point of time.
We have seen a very sharp move of around 20 percent post the approval from Halol facility, which seems to suggest that the inspection or whatever regulatory slag had developed at that critical facility from Sun Pharma because that contributes around 20-25 percent of revenues, that seems to be over.
However, it can be no ones case that at 26 times forward earnings, the risk was being discounted and then market has moved in to correct that.
There is a lot of hope around successful turnaround of Ranbaxy with good measure because the company has a track record of driving value out of its acquisitions and I think that remains the key monitorable. As a result of what you saw in Halol, you see some of the US formulation business pick up once again. So, I think these two near term positives seem to be explaining the price move, but that is as steep as it can get in terms of valuations.
Q: Just want you to take us through all of your top picks in the pharma space quickly.
A: Our pecking order in the pharma space largecaps stays Dr. Reddy's, Lupin and Cipla. In the midcaps we like Ipca and Torrent Pharma.The Great Diwali Discount!
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