Dr Reddy's Lab top pick in pharma: IIFL Capital

There has been a major rally in pharma space in last couple of weeks. Bino Pathiparampil of IIFL Capital feels that there is still money to be made if one picks the right stock.

Dr Reddy's continues to be his top pick among the largecap pharma stocks. He expects a 25-30 percent return from the stock over the next one year period. Also read: Trade deficit a worry, positive on pharma: Mirae Below is the verbatim transcript of his interview to CNBC-TV18 Q: There has been a general wave of aversion in the pharmaceutical space. We have seen many stocks sell off quite a bit. What is your approach towards the entire space in general and the kind of overall recommendation that you would have in the pharma sector? A: We have seen a major rally in the sector over the last couple of years. This really accentuated if one looks at the space over the last couple of months. So, many of the stocks actually went up 20 percent in the last couple of months itself. After that run up valuations were actually looking a bit stretched and some correction was due which has now happened. Ofcourse, there are some fundamental reasons which triggered that as well like Mylan’s launch of generic Tricor, which could impede Lupin’s profit growth going forward. Then poor set of numbers from Divi’s Labs, Apollo Hospitals etc. However, after the correction we are more seeing a settling down. If we pick and choose the right stocks the sector can still give returns. Q: Just focusing specifically on stocks now. What’s happening with Ranbaxy, the stock has lost around eight odd percent in the past week odd and there is more and more negative news, which is doing the rounds on Ranbaxy. Can you just clear the air for us in terms of possibly even the Drug Controller General of India (DCGI) now possibly reviewing Ranbaxy’s drugs etc. And what exactly would be the implications especially on a profit and loss (P&L) perspective as well as sentiment perspective? A: As far as the operations and numbers of Ranbaxy are concerned we have seen the worst. I don’t think any of these ongoing news about new investigations or settlements etc. will impact the current operating performance of Ranbaxy. All these are issues, which we are nearing the completion and going forward this should not impact their operations. However, at the same time the stock has been quite highly valued. There was expectation of quick turnaround in the business in several aspects of the business, which I don’t think is happening any time soon. So, as the market realises this slowly and slowly, the stock can still continue to underperform because the valuations are unsustainable despite the performance being bottomed out. Q: You have a couple of picks in the pharmaceutical space, so let’s talk about them. Dr Reddy’s – that stock has actually been a favourite of many brokerages like yourself. It has moved about 15 percent in the last three months. What’s the expectation in terms of a target price there and what could be the next trigger for Dr. Reddy’s? A: Among the largecap pharma stocksReddy’s continues to be a very good pick at this levels. Even after running up by about 15 percent it is still trading at a cheaper valuation than most of its peers like Lupin, Cadila, Cipla and Sun Pharma. I expect the same kind of performance as those highly valued stocks from this stock as well. The company should deliver a 20 percent earnings growth in FY14. Visibility of that growth will provide some kind of re-rating to the stock. This could add to the upside of the stock price. So, I would expect a 25-30 percent return from the stock over the next one year period. The triggers could be launch of some select products in the US market, which are limited competition products. We don’t have a complete cover on what are them as of now yet. However, as we go along the way in FY14, we will come to know. As well as quarter-after-quarter continued earnings growth should act as trigger for the stock. Q: A question with regards to Sun Pharma because they are hiving off their domestic formulation subsidiary. What sort of impact would it have on Sun Pharma? A: I don’t think it should have any kind of impact as far as the consolidated operations are concerned. The domestic operations till now were housed in the parent company for better operational control and better strategic supervision. The company is shifting it into a separate subsidiary. This should not impact the ownership or the valuation of the company in any form at the consolidated level.