Hold Sun Pharma, book profits on Lupin now: AnandRathi

The pharma sector has been on a roll over the last two years, but now it is seeing some cracks in the wall. Sriram Rathi of Anand Rathi says, in terms of valuations, most pharma stocks have reached their peak, but there are still a lot of opportunities which can drive positive surprises on the earnings side.

In an interview to CNBC-TV18, Rathi says many pharma companies have received bad news from global regulators, particularly the US FDA, in the past three-four years and it is likely to continue going forward.
Rathi recommends booking profit in Lupin at current valuations. He has a neutral rating and a 'hold' on the Sun Pharma stock because there are several triggers which can drive the earning surprise positively. "In Sun Pharma, 15-20 percent growth could sustain for the next two-three years and from the currency side also they will be gaining a lot because 75 percent of the revenue is coming in terms of the US dollar," he says. Below is the verbatim transcript of Sriram Rathi's interview on CNBC-TV18 Q: As a sector pharmaceutical is beginning to show some kind of valuation fullness especially because we are beginning to get a series of bad news in terms of questions from various drug regulators?
A: In terms of valuations most of the stocks are towards their peak, but there are a lot of opportunities which can drive positive surprises on the earning side whether it is related to product specific, news flow on the US market or on the currency side and at the same time the free cash flow generation for most of the large cap companies has been expending upwards of 20 percent.
Therefore, all these are factors which are driving valuations. So, there are some stocks which are already fully valued on their valuations and at the same time there are some stocks where we can still see some kind of rerating going forward.
In terms of negative news flow, several companies received them from regulators, particularly the US Food and Drug Administration (US FDA), and that has been there for the past three-four years. It started with Sun Pharmaceutical Industries, Cipla and Cadila Healthcare, Aurobindo Pharma, Claris Lifesciences, all these stocks have seen that and some of the stocks have already come out of that. So, that kind of thing will continue going forward and the US FDA is going to become stricter and that is going to be there in the sector and currently Wockhardt is the one which is facing that kind of issue. Q: Based on your outlook on the entire pharmaceutical space would you recommend booking profits in key stocks like Lupin or perhaps Sun Pharma, many of them are sitting virtually at record highs?
A: There have been several opportunities in Lupin which could have driven the earnings surprises but looking at the current valuations, it seems that that is already into the price and our fair valuation for Lupin is Rs 800 approximately and possibility of upside from Yasmin, Yaz and other oral contraceptives (OC) products are already into the price. So, we recommend profit booking in Lupin at current valuations.
In Sun Pharma we are recommending to hold the stock. We have neutral rating on the stock because there are several triggers which can drive the earning surprise positively. We believe in Sun Pharma 15-20 percent growth could sustain for the next two-three years and from the currency side also they will be gaining a lot because 75 percent of the revenue is coming in terms of US dollar. Q: You have a buy on Wockhardt. Wockhardt was one of the big gainers probably 300 percent gains 12 months ago but now the bad news does not seem to stop. Would you buy it now at current levels or would you wait for the bad news to play out?
A: On Wockhardt, we are recommending a hold and one should wait for any fresh buying for the next two-three quarters because there will be no positive trigger on Wockhardt for next two-three quarters. The only thing is that valuations are looking very attractive at current levels. It is trading close to six-seven times FY15 earnings and on the base business side after considering the impact of US FDA import alert as well as UK Medicines and Healthcare products Regulatory Agency import alert the earnings per share for FY15 could be upwards of Rs 100. Therefore, based on that, the valuations are looking very attractive.
In case of Cadila, Aurobindo, Claris we have seen that in case of the US FDA import alert the stock takes almost one to one-and-a-half year to start rerating further in terms of valuations. So, we are expecting a similar kind of a thing in case of Wockhardt. The stock has corrected significantly compared to any other stock so below Rs 800, we do not see any significant downside from hereon in the stock. But investors, who are already holding on to this stock, should continue to hold.