Worst over for Ranbaxy; buy Lupin on dips: Antique Broking

In an interview to CNBC-TV18 Anmol Ganjoo, Antique Stock Broking shared his views on the pharma sector.

Given the strong US product pipeline, one should buy Lupin on dips, he said. “Lupin’s product pipeline in US for two years offers greatest visibility. There is a ramp up as far as oral contraceptive is concerned plus the branded franchise continues to do well,” he explained. He is also upbeat on Ranbaxy and feels that worst is over for the stock as it will manage to get over US FDA issues. The company posted better-than-expected April-June sales at its US unit. (Read More). Meanwhile, Sun Pharma's multiples may not contract going ahead because specific opportunities in United States will continue to provide cushion to Sun Pharma’s earnings, he added. The stock tumbled 5 percent in morning trade on Thursday after the generics drug maker's subsidiary Taro Pharmaceutical Industries reported a 7 percent year-on-year drop in its first quarter earnings. Below is the edited transcript of Anmol Ganjoo’s interview with CNBC-TV18 Q: Your first thought on Sun Pharma because the Taro numbers seem to have caused a bit of disappointment? A: Taro numbers have not been able to maintain what has been a very impressive trajectory, but I don’t think it was anyone’s case that the margins in Taro are going to sustain at 50 percent plus levels for ever. It is a blip, but this was along expected lines. We also continue to believe Sun’s pipeline from an 18 month stand point offers multiple offsets to take care of any of these shocks. Taro’s contribution to Sun Pharma has anyway exceeded the time limit that we all were budgeting for. It has been some tapering off but it was imminent in any case. Q: Do you see the possibility of PE multiples contracting for Sun Pharma? A: No. I don’t think there is a case for contraction in Sun Pharma’s multiple because for Sun lot of other earnings Dusa and URL also come on board. Specific opportunities in United States will continue to provide cushion to Sun Pharma’s earnings. Any erosion in Taro’s margins which was expected should be taken care of by specific product launches in the US. I completely rule out the possibility of PE contraction as far as Sun Pharma is concerned. Q: How about Lupin- that stock lost 10 percent in the last couple of days. That has also been an outperforming name – how would you approach this correction? A: I would look at this opportunity to add on to this stock for a simple reason that Lupin’s product pipeline in US for two years offers greatest visibility. There is a ramp up as far as oral contraceptive is concerned plus the branded franchise continues to do well. We have to also remember that in this quarter the impact was felt on account of Suprax seasonality in the US. They are also coming of a very high base as far as the last quarter is concerned. FY13 was a 50 percent earnings growth for Lupin, so expectations do get build up, but that is unlikely to get repeated. As far as 15 percent earnings growth prospects for the company are concerned, they still hold good. If that were to happen then the multiples for Lupin will hold at 21-22 times. We view this correction as a buying opportunity. Q: Any thoughts on Wockhardt after the recent price destruction? A: Not specifically on the name, but we do highlight that these events with respect to US regulator whenever they pan out there is no point trying to access the earnings impact. Wockhardt is currently in that kind of a situation where the earnings impact in the US and spreading of regulatory action to other geographies could keep the earnings outlook hazy. History suggests that until one has satisfactory resolution of these or at least hints to that effect, the stock is unlikely to perform. Q: Ranbaxy for a change is got good reception to its results this morning. What are your conclusions from the numbers- can you say that the worst is over for that stock after that serious bouts of underperformance? A: Yes. That is in fact our recommendation this morning to clients. We did upgrade the stock after staying negative on the stock for around 8 to 9 quarters. We think that the worst is behind Ranbaxy as far as stock price performance is concerned. There are two-three reasons which underline our faith that at current market price the risk reward is completely in favour of the investor. The first is that we think the worst of regulatory action or the operation impact on the performance is already done. One has seen the company make USD 500 million settlement with department of justice (DOJ). All the adverse news flow related to products etc has been in the offing for a while and stock has accommodated from a price point of view. Margins seem to be bouncing. In the last two quarters margins have moved from 3.5 to 10.5 percent. What is most encouraging is that after a very long-long time one has seen base business in the US inch up and not withstanding the currency benefit. The US business performed handsomely. As far as remediation cost which suppress the margin profile of the company is concerned those also from CY14 standpoint should abate and purely on those turf earnings if one gives a mid-cycle kind of a multiple we see an easy 20-25 percent to be made on this stock and then take a call from there.