Give Ranbaxy time to fix issues; bullish on Lupin: Antique

Even though USFDA's clarification on Ranbaxy's plants is a mild positive for the troubled pharma major, by no means it translates into a clean-chit for its Mohali unit, says Anmol Ganjoo, pharma analyst, Antique.

Ganjoo is cautious on the stock and says one should give the company time to fix the various problems in its US business.

On Tuesday, USFDA clarified that there was no proof of data reliability issues other than at 3 units that are Paonta Sahib, Batamandi (part of Paonta) and Dewas. It said, "Company's two manufacturing plants (Paonta Sahib and Dewas) remain under ongoing review, under the consent decree. There is no evidence of major current good manufacturing practices (cGMP) violations except at these two plants in India and Gloversville, a unit in New York, which Ranbaxy shut in 2011."

Additionally, Ganjoo is betting big on peer pharma company- Lupin. He believes that an investor's returns should be in-line with the company's 14-15 percent earnings growth.

Below is the edited transcript of Ganjoo's interview to CNBC-TV18.

Q: How have you read the news on Ranbaxy? Going forward do you expect some launches from Ranbaxy which should help at least curtail the kind of downward spiral the stock has been in and do you expect some recovery in the stock then?

A: In terms of what the fine print on the US Food and Drugs Administration (USFDA) comment was, it clearly categorised that the three facilities of Paonta Sahib, Dewas and Ohm very differently from Mohali.

This is important, but I did not read anything to the effect which clearly says that Mohali is clearly out of the woods. Purely, in terms of segregating the severity of regulatory action, Mohali has been made a different bucket based on what the observations were.

This leads us to believe that there is still a possibility of some imminent launches from Mohali and Diovan, which was scheduled to get launched September last year still remains a possibility and it could be a huge upside for Ranbaxy.

Given where the valuations are, it could make sense to probably be a little more optimistic as far as the prognosis on the US based business is concerned. But purely based on the FDA observations yesterday, I do not think there was a clean chit to Mohali. There was just a segregation as far as the severity of regulatory action was concerned which is a mild positive.

Q: How do you approach the stock as a whole at this juncture?

A: One needs to give Ranbaxy time before it actually fixes the various problems in its US business. One has to also take a view that unless one sees an improvement in the ground as far as offtake of drugs in the US is concerned, one cannot become very constructive on the stock purely on valuations because Ranbaxy business in the US has been struggling for many years now and the resurrection could also be a multi-year process. We would still wait to see signs of improvement on the ground and a product launch from Mohali would be one such catalyst which could force us to turn positive on the stock, because valuations do discount a lot of bad news.

Q: What is your house call on Lupin? It keeps making new lifetime highs. Today also in a weak market it is trading at a lifetime high. In terms of valuations, in terms of new triggers how are you placed on that stock?

A: Lupin is something we have been backing for a very long time now and we still think that there is some steam left.

If one looks at FY13, it was a stellar year for the company. They recorded around 50 percent earnings growth. The hurdle rate for the stock performance this year is going to be far lower. Even at a 14-15 percent kind of an earnings growth, the multiples should stand and one’s returns on the stock should be in-line with the earnings growth performance.

As far as the earnings growth for FY14 is concerned, we think it is going to be front-ended for first two quarters because of great visibility on some of the products. Also, as far as the later half of the year is concerned, one should see some imminent pick up in news flow related to oral contraceptives etc.

The only negative as far as whole sector is concerned is what the impact of the new pricing policy will be as far as the domestic market is concerned and this quarter, based on performance in the domestic market as well as the management commentaries should give us some colour on how to position for the rest of the year.

Lupin is something which we still continue to back. We think that all the performance will be front-ended, but the hurdle rate in terms of earnings growth for stock performance to sustain is much lower this year.

Q: What about midcap space in the pharma sector? That is the relative outperformer in this badgering that we have seen. We understand you are positive on Ipca Laboratories and Biocon. Does that still hold and what are your levels?

A: I think Ipca will continue to back till around Rs 750 levels although the stock has had a very short run up. From a timing standpoint, anything closer to Rs 700, we are not comfortable. However, one also has to remember that it will be participating in a lot of interesting opportunities and is also a great candidate for that jump from midcap to large cap stocks and that is around the time when a lot of multiple rerating happens.

So, Ipca is something where one has interesting triggers. Indore SEZ being cleared is one of them, but they again are to some extent the victims of the new pricing policy. More inflow of bad news is the Maharashtra chemists’ strike. They get around 12 percent of their sales from Maharashtra.

These are some near-term hitches which make us look at Ipca, closer to Rs 600 kind of level, but from a 12-month standpoint we think that Rs 750-770 levels should be pretty much on. Biocon is something that has not participated in this rally and has a lot of triggers waiting for it. It is one of the cheapest stocks in the midcap universe and does not have a lot of balance sheet stress. So, purely on that basis, we think that one can participate in a potential out-licensing opportunity for free, because one is getting the base business fairly cheap at 13-14 times earnings. So Biocon is purely a valuation call where we think that there are no negative triggers left and if one buys the stock at 13-14 times and hope that something materialises either on the insulin or the monoclonal antibody (MAb) front, then that could be a key rerating trigger for the stock. So, it is basically the optionality of out-licensing which we are getting very cheap given where the base business is trading at.