Two pharma stocks that can improve health of your portfolio

In an interview to CNBC-TV18 Sarabjit Kour Nangra of Angel Broking shared her view and outlook on various pharma stocks.

Ranbaxy and Cipla were at 52 week highs on Monday. Kour expects Cipla to perform well going ahead. She is bullish on this stock; however, she is cautious on Ranbaxy. "For Ranbaxy there have been long pending issues in terms of their US and base business not doing that fairly well. I would rather look at the base business improving before turning my call positive on Ranbaxy. Right now, we are neutral on Ranbaxy," she elaborated. Further, she sees Lupin and Cadila doing fairly well over the next couple of years. "These two companies can consistently deliver a 20-25% CAGR growth over the next couple of years. These stocks have still a room to go in terms of creating wealth for investors who are looking to invest long term in pharmaceuticals," she explained. Angel Broking has a buy call on these two stocks. Below is the edited transcript of Kour’s interview with CNBC-TV18. Q: Ranbaxy and Cipla both these stocks were sitting at 52 week highs yesterday. What is your target price in both of these and how would you approach it in terms of further triggers for both of them? A: Cipla and Ranbaxy both have been dealing with issues which have restricted their core earnings growth. Cipla for over a long period of time has underperformed health care with last quarterly numbers. There are signs that possibly, going forward the numbers will come through. With the whole health care sector doing fairly well, Cipla has caught up right now. That is the reason, multiples are catching up there. For Ranbaxy there have been long pending issues in terms of their US and base business not doing that fairly well. There are noises which indicate that resolutions will come through going forward. We are still a bit positive on Cipla in the sense that we have seen a slow earnings growth and possibly the earnings might accelerate couple of periods. But I am a bit circumspect about Ranbaxy at this point in time. I would rather look at the base business improving before turning my call positive on Ranbaxy. Right now, we are neutral on Ranbaxy, but we are positive on Cipla though it has achieved the target of Rs 400 as of now. Q: What about Lupin, it’s absolutely not a disappointment for the past several months, years if you please, it’s been a one way street for the Lupin stock, would you think that there is still juice left in it? A: Definitely, we have seen a good rally in pharma across the board be it midcaps or large caps. Amongst the large caps, Dr. Reddy only has not participated so much into this rally, but otherwise we have seen most of the stocks do fairly well. I see Lupin and Cadila doing fairly well over the next couple of years. Cadila has reached higher multiple right now. Its already trading 19 times which is on the higher side. These two companies can consistently deliver a 20-25% CAGR growth over the next couple of years, which will put them in league of large caps. I believe that these stocks have still a room to go in terms of creating wealth for investors who are looking to invest long term in pharmaceuticals. _PAGEBREAK_ These are the two stocks which we have been consistently recommending. We believe they are the next good wealth creators for investors in pharmaceutical sector. We continue to remain buyers in both the stocks from a long term perspective. Q: You look at Orchid Chemicals, what exactly did you make of the recent deal? How optimistic would you be on the stock especially on the balance sheet perspective? A: We like the deal in the sense that balance sheet has been our main concern with respect to Orchid over long period of time. There have been concerns that the balance sheet is pretty stretched, which had taken the debt equity level pretty high. With this deal one thing happens is that the balance sheet gets strengthen all the more, their debt to equity becomes more comfortable. The only negative point is that after the deal, there would be some strain on the topline growth for the company because the unit contributor almost Rs 450 crore on the topline. Orchid was one company which was trying to get directly into the generic space, but now it is trying its way out through contract manufacturing. Now that entails another leg possibly capex might not happen very soon, but it could possibly happen later on. Also because it is just entering into contract manufacturing, you have to see how it pans out going forward. In terms of recommendation the stock is already factoring in everything steady in terms of 8-9 times FY14 numbers. Given that, base business would be operating at 14-15 OPMs and the stock is available at 9 PE whereas API contribute almost 70-75% of the sales turnover, I don’t see the stock could possibly fetching a higher multiple. There are other opportunities available in the markets. As of now we are neutral on the stock. Though the deal is positive I would like to see how the strategy of the company pans out before changing our view or assigning a higher multiple. As of now, I see it a fairly valued company and not much upside available over there. Q: Do you have a view on Piramal Healthcare and if you have read the news with regards to Ind-Swift Laboratories this morning? A: I would not be able to comment so much on that. We don’t track that stock anymore, but possibly the company is trying to restructure its business, focus more on core areas. They are trying to realign their business portfolio. So, there will be some activity happening over there.