IIFL's best bet from 'promising pharma' space

Q: Generally are you all positive on the pharmaceutical space as a house, is IIFL going the cyclical way and therefore believes that we could ignore pharmaceuticals for now or do you think you are still adding onto your pharmaceutical portfolio?

A: Pharmaceuticals while being defensive stocks also offers a great amount of growth. If one looks at the earnings growth of the companies in the pharmaceutical sector over the last four-five years, most of them have delivered north of 20 percent compounded annual growth rate (CAGR). I don’t see that materially coming down in the next couple of years as well. So, to that extent, there is no reason to cut down on pharmaceutical investments even while the cyclicals are picking up. Hence, we continue to remain bullish on the pharmaceutical space.

Q: You have retained of course a market favourite and someone who has delivered very well, Sun Pharmaceuticals but not so positive on Lupin which is another stock that has delivered decent gains, just take us through your strategy on both these?

A: Sun Pharmaceuticals has delivered exceptionally strong numbers over the last several quarters and they have beat expectorations by a wide margin which I think continued into the most recent quarter as well. The reason I still like the stock is that I believe they can continue to do it for the next two-three quarters at least.

The big price increases in Taro continue to sustain and last quarter’s numbers suggest that they have taken even more price increases. The Doxil opportunity in the US has become larger with J&J pulling out of the market. So, these are not fully captured in the current expectations, which is why I continue to remain positive on the stock.

Lupin also has done reasonably well over several quarters but at the same time, there are some headwinds to continued performance over the next couple of quarters. The first one is the loss of couple of products like Antara in their US branded business; potential price erosions seen in Tricor; the relatively weaker Japanese Yen. So, these kind of headwinds may put some pressure on Lupin’s growth over the next two-three quarters, which is why I am bit cautious on that stock.

Q: There are two stocks which I must discuss with you both superb midcap picks, Divi's Laboratories, if you pull up one year of Divi’s Labs just to give you an idea of how much this stock has done in the past three months or so, one year chart will emphasize that extraordinary uptick we have seen in that stock, you are still bullish on that space as well your take on Ipca, it is just a steady uptrend and almost a doubling in a year for Ipca Labs as well, target on both?

A: Divi’s Labs continues to be a great business to own. It is one exceptional company operating in the contract research and manufacturing space (CRAMS) that continues to make very high return ratios, maintain very high profit margins. But the company has not delivered that kind of growth in the last few quarters which probably resulted in the stock not giving that great returns as people expected.

However, I expect growth to get back over the next two quarters. There are aspects which are improving in the business, capacity is coming on line, US FDA approval will accelerate that process and power costs are coming down. So, I expect the company’s growth to get back on track and over the medium-term it should continue to be a great story to own as it has been for the last few years.

Coming back to Ipca, what we have seen in Ipca is a major rerating in valuation. It was a midcap stock which used to trade at 12-13 times which has now rerated to 17-18 times. I don’t expect that rerating to stabilise at that 17-18 percent but still I believe they can deliver high teen earnings growth and related stock returns should continue.