Bullish on Lupin, Aurobindo; cautious on Ranbaxy: Religare

However, he is cautious on Ranbaxy Laboratories because the earnings visibility is very low and he believes that the expectations of a turnaround in the US business etc are seemingly priced-in the stock. "I do not see material improvement in profitability over here. So I would remain cautious in this," says Bothra.

Whereas, he is positive on Sun Pharma and says there is more to Sun Pharma than the Doxil (News that Johnson and Johnson (J&J) signed agreement to restart manufacturing Doxil). There are near-term launches for the company like Yaz, Temodar and Niaspan, which could lead to earnings upgrade.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: What would be your view on Aurobindo Pharma after the kind of doubling that we have seen this year?

A: Two things have been turning positive for Aurobindo Pharma of late. Their US business is continuing to do exceedingly well, both on execution of product launches as well as the quality of product approvals that they have had and that has been very positive for the stock.

Secondly, more relevant and important for Aurobindo has been steady improvement in cash flows and profitability which has led to reduction in debt levels in the last two quarters by close to USD 110 million which is what has excited investors more.

Going forward in the near-term they have benefited from Cymbalta product opportunity or Duloxetine where initial expectations was to have 8-10 players on day one whereas only Aurobindo, Lupin and Sun Pharma has been able to launch thus far. So the opportunity suddenly becomes much more lucrative than it was anticipated and from Aurobindo's base that would be a significant positive. So what we have seen consistent earnings improvement in the first half, you would see even stronger second half for Aurobindo. So I remain positive and though it is not in my active coverage list, but I have been tracking the stock and I am positive on the stock at these levels.

Q: What is your view on Sun Pharma and that news that just came sometime back with regards to Doxil that Johnson and Johnson (J&J) is possibly going to restart manufacturing it?

A: J&J's product availability issues that has been fluctuating over the last one year or so, in October they announced that the availability of Doxil would be constrained for a least a year or year and half. So the street was expecting Doxil supplies by J&J to be restricted till 2014 end. However, today it is understood that J&J has tied up with Ben Venue to lease part of its facilities and restart some part of Doxil supplies to address the supply constraints. This could happen 6-9 months earlier than was anticipated.

What it essentially implies - for Sun's earnings impact for FY15 is roughly 2-3 percent on EPS but having said that, one should bear in mind that J&J would still not be able to do so without full FDA approval. Secondly, the current process by which J&J manufactures is not approved by FDA and hence only owing to product shortage it would be approved on a batch to batch basis.

So the impact on Sun may not be as high as you might fear. Having said that, it is definitely a negative development from Sun's perspective. From an overall earnings perspective or expectations I would not change my view on Sun, I remain positive, because there will be more than Doxil opportunity that Sun has to look for. You would have near-term product launches like Yaz, Temodar and Niaspan which would lead to earnings upgrades and even the Cymbalta low competition scenario is going to benefit Sun.

Q: What about Wockhardt? Just for last week or so we have seen some interest come back in that stock. How would you be placed there?

A: I would doubt that this interest or surge in stock price has to do much with fundamentals per se, because as you are aware much of its US sales would be affected due to FDA issues and that was a key profit generator for the company. Resolution of those issues would take a longer period of time.

Having said that, at some point in time maybe the investor community feels there is value in the stock as the recurring EPS could still be at around Rs 25-30 in a base case scenario. My personal view would be given the FDA uncertainty etc. the valuation should not rerate much faster. Having said that, institutional investor interest in Wockhardt is relatively low, so any new incremental buyer can help drive the stock price.

Q: What are you recommending to investors on Ranbaxy and what would your rationale be on it?

A: My view on Ranbaxy is a bit on the cautious side. I believe again here the earnings visibility is very low. Much of the expectations of a turnaround in the US business etc is seemingly priced-in the stock and I do not see material improvement in profitability over here. So I would remain cautious in this.

However, there has been lot of excitement around this stock on possible speculation of a buyback by the parent Daiichi Sankyo or a possible delisting as has happened recently I the case of GSK Pharma. Daiichi Sankyo has gone on record to say that delisting is not on the cards, but like I said it is a classic case of earnings disappointment continuing for a fairly long stretch of time.

If you look it from acquisition price perspective and the way rupee-yen has behaved for Daiichi, incrementally it would be a lower cost to acquire the full stake.

On a fundamental basis I do not recommend buying into the stock, but clearly there are other factors that are driving the stock move.

Q: What would be your top picks and pecking order for these pharma stocks?

A: My top pick would be Lupin followed by Sun Pharma and Dr Reddys in the pharma space. The key rationale is I would like to stick with quality names with a deeper product pipeline. Of course that has to be backed by solid financials as well. Lupin satisfies all these three criteria. What we are looking at going forward is high number of launches in the US which are margin-accretive. So starting with Trilipix, Trizivir and Cymbalta in this quarter you would have Yaz, Renagel or possibly Niaspan with extended low competition period to sustain in the second half and we are also looking at a domestic market growth recovery for Lupin.

I like Sun for deep quality of its pipeline and sustained earnings surprises and Reddys is third on the pecking order.

Amongst the midcaps I like Ipca and Divi's Laboratories followed by Glenmark. All these three stories are relatively low on valuations and fairly stable businesses.