Buy Dr Reddy's; Divis Lab, Biocon good bets: IIFL Cap

Speaking about the pharma space, Bino Pathiparampil of IIFL Capital told CNBC-TV18 the success of Biocon's oral insulin product deal would be a positive for the company. He also has a buy on Dr Reddy's and believes it should give a 25 percent plus upside in the next one year. Pathiparampil is also positive on Divis Lab but, he wants to take a wait and watch approach for Cipla.

Also read: Top 10 intraday and long-term bets to beat volatility Here is the edited transcript of the interview on CNBC-TV18. Q: I am going to start with Biocon. Post the BMS or Bristol-Myers Squibb deal on oral insulin, where do you think Biocon is headed in terms of valuations and how much of an upside do you actually see from this option agreement?
A: The BMS deal was incrementally positive for the oral insulin program of the company but, I think still it is a little far away from phase II studies where the company has to clearly establish the efficacy and safety of the product. Till those studies are over and we see more commitment from BMS in terms of actual license payments or milestone payments, I think it's a bit too early to take a call on that. But, if it succeeds it could be a really big drug for the company. Q: You have a buy on Dr. Reddy's, what are you pinning your hopes on?
A: Dr. Reddy’s has performed really well over the last two three years both in the US market and in the domestic market except for that brief period of slowdown, they have done well. In other markets like Russia and other emerging markets they have done well. Going forward also, I think reasonably good performance should continue.
Strong earnings growth should continue even beyond the current phase that we are seeing and even in the near term second half of FY13 should be a very good period where they will have some extra revenues coming in from so far undisclosed products in the US. Despite all this, the stock is trading cheaper than peers like Lupin, Cadila, Cipla, etc which I think makes the stock attractive. I believe valuation re-rating together with earnings growth should give a 25 percent plus upside for the stock over the next one year. Q: Wanted your view with regards to Cipla because that one actually had a very good set of Q2 FY13 numbers, not to mention Q1 FY13, so the first half of the fiscal has been pretty strong in terms of fundamentals for Cipla, how much of an upside do you see in terms of the remaining part of the fiscal possibly from a EPS as well as valuations which could extend into FY14? What is the target price that you would be working with?
A: The first half of this fiscal for Cipla was extremely great. But, I would take a wait and watch policy there because the first half also had the benefit of one-off Lexapro sales in the US. Excluding that one-off benefit, which will go away in subsequent quarters, I doubt if the base business has improved as significantly as the street is currently seeming to build in.
I would wait for next quarter numbers to see how much of the good set of numbers have come from base business and how much is one-off and further upside from these levels I think strictly depends upon that outcome.
_PAGEBREAK_ Q: Among the sterling set of numbers that came this quarter was from Divis Lab, whether it was EBITDA or topline. What more can you expect in terms of price increases here?
A: Divis came out with a good set of numbers, another quarter of strong growth, 20 percent plus growth. I believe the company will continue to repeat the performance in the second half as well as in FY14. This year they had the extra benefit of rupee depreciation which may not be there next year.
To that extent, growth rates may come down but, structurally I continue to believe that it's a growth story. That is a growth story with plenty of free cash generation, very good return ratios and it will continue to get the high valuation it currently attracts. Q: In the past couple of trading sessions and especially yesterday, there was a lot of uncertainty seeping into a couple of pharmaceutical stocks such as Lupin etc which were down possibly on that pricing policy or the impending pricing policy where it is expected to be taken up by the cabinet later this week. Give us the contours of this pricing policy, give us the positives and negatives and which are the stocks which would be the most impacted negatively if it does come through in its current form?
A: The Group of Ministers had recommended a market based pricing policy but, of late there was a finance ministry note that got circulated and it has added some confusion to the decision. However, the Group of Ministers are meeting tomorrow in the presence of the finance minister to take a final decision on this front.
It would be a bit premature to speculate anything before that. But, I continue to believe that we may not see any drastic step from the government. If the government imposes a cost plus price control on all national list of essential medicines and they include all dosage forms, all combinations within the ambit of that price control, that would really be a drastic step.
I don’t think that is something which is quite likely and assuming that it doesn’t come through, the impact on the industry would not be very severe and easily absorbed by most companies except maybe select MNCs which have too high end exposure to the domestic market and have a very high pricing in the market. If it goes through in the current form, the impact would be less than 10 percent at the earnings level for most companies. So, it is not very worrying but, within that possibly Cipla, Cadila and to some extent Lupin may be the most impacted. Q: In the past couple of years pharma has hardly behaved like a defensive. Some stocks like Wockhardt and Sun have actually behaved like growth stocks. Why are they not in your list, stocks like Lupin, Sun Pharma, Wockhardt none of them are in your list of buys?
A: Sun Pharma, Lupin continue to do well and Wockhardt after years of problems with their balance sheet have also come out of all those issues and started performing well. But, these stocks have run up quite a bit and valuations are quite rich. Till the time we have a very good growth visibility into FY14 and FY15, I would like to wait and watch.
Although, from a long term perspective, if one has a three to five year perspective, I would still believe Sun and Lupin are good buys even at these prices. But, near term returns on these stocks could depend upon FY14 growth visibility which as of now, I can't say is very clear, more so probably because of the very high base of FY13.