See good upside in Dr Reddy's, Divis, Torrent Pharma: IIFL

Bino Pathiparampil of IIFL is bullish on Dr Reddy’s, Divis Laboratories and Torrent Pharma. These stocks have attractive valuations and strong growth prospects. "These three stocks have good upside even in this market," he told CNBC-TV18.

The market is now favouring sectors offering better beta, but Pathiparampil don’t see a major contraction in pharma sector valuation. "The valuation premiums in this sector are definitely there to sustain, but if the markets remain favouring beta then probably the upsides could get capped a little bit," he warned. Below is the edited transcript of Pathiparampil’s interview with CNBC-TV18. Q: There was a lot of talk on Ranbaxy yesterday. The Diovan generic didn’t get the clearance despite Ranbaxy having the go ahead to launch. Did you see that as a negative development? What in your eyes is the fair value for that drug for Ranbaxy at the moment? A: Diovan certainly was a disappointment for Ranbaxy. There were some people who were expecting Ranbaxy to get 180 day exclusivity on the product, but with Mylan’s launch and Ranbaxy not launching so far, at least partly they are getting devoid of that opportunity. This is a USD 2 billion plus drug at brand prices and could have been a significant addition to Ranbaxy’s profits for next couple of quarters, but looks like that opportunity is lost. Still next two quarter numbers may benefit from Actos, the authorized generic which Ranbaxy launched a couple of weeks back. So, the numbers for next two quarters should look good. Q: You have a buy on Dr. Reddy’s Laboratories. It was in the news because of the launch of Amoxicillin tablets in the US. What exactly excites you about this company? A: Dr. Reddy’s is one of the stocks in the pharma space which hasn’t run up and become very expensive. At the same time, it has got a good growth profile, which is as good as its peers or possibly better. The company is delivering 25-30 percent earnings growth this year as well. Going forward, I believe they can continue to deliver a hike in earnings growth and the stock is relatively cheap compared to peers. This makes Dr. Reddy’s exceptionally attractive. The company’s business portfolio which includes the US business and a strong emerging market presence, especially in the domestic market and the Russian market all are areas where long-term growth looks intact. Q: The environment in the market right now is sort of risk on. Pharma traditionally being seen as defensive is not on the top list right now. What can you choose out? Are there any other stocks where you feel valuations are not very heady and can still be bought into given their growth profile? A: That’s right. Of late in the last few months we have seen a rally in pharma, which has led to a lot of visibility of growth getting priced into the stocks. Dr. Reddy’s still remains at a very attractive valuation. I believe the valuation gap will contract and that stock should do well. Another stock in the large cap space that comes to my mind is Divi’s. After a recent correction, the valuation there also looks attractive to me given the growth prospects, the sustained very high margins and the very high return ratios that the company generates on its investments. If you come down to the midcap space, Torrent Pharma can still continue to do well. They have a very strong portfolio with about 70% of their business coming from emerging market branded business which is a business that can deliver growth steadily for maybe couple of decades. These three stocks have good upside even in this market. Q: We have seen a decent run up in the past several months when the market was otherwise comatose. Does that mean that valuation attraction of most of the pharma companies is now not there? A: Valuation attraction may not be there, but I don’t see a major contraction in valuation either. While the market is favouring sectors that offer better beta, I don’t think anyone can deny the fact that most earnings visibility is there in this sector. That growth is almost certain and given and very few sectors can boast of that kind of visibility. The valuation premiums are definitely there to sustain, but if the markets remain favouring beta then probably the upsides could get capped a little bit.