Sun Pharma a must in core portfolio: Experts

With the shares of Sun Pharma hitting record highs at Rs 932, up 4.5 percent intraday on Monday after its subsidiary Taro posted strong September quarter results led by price increases, the big question is whether the stock looks expensive at current valuations.According to both market experts Nipun Mehta of Blue Ocean Capital Advisors and Dilip Bhat of Prabhudas Lilladher, the stock is reasonably priced and does not look too expensive. Experts also agree that it would rank as one of the top three picks within their pharma portfolios. According to Mehta although the stock has run up quite a bit, it looks fairly strong backed by good fundamentals. “At 27 times FY15 earnings, it is reasonably priced," he says.Moreover, for the company both its domestic and other businesses are doing good. It has also filed few NDAs, says Mehta.Bhat too agrees that the fundamentals look good. Moreover, the company is sitting with USD 2 billion cash and is always on the lookout for acquisitions to enhance growth. The Ranbaxy deal will only boost the stock further, he adds.“Cannot imagine a core portfolio without Sun Pharma," says Bhat. His other pharma pick would be Lupin.When asked if they would buy the stock today - both were affirmative.For Mehta other pharma picks would be Lupin and Aurobindo Pharma.However, shares of Sun Pharma were under pressure on Friday after Ranbaxy lost 6 months exclusivity for generic anti-viral drug. Analysts feel approval of Sun Pharma-Ranbaxy deal will be key driver. Sun Pharma had announced acquisition of Ranbaxy in April 2014 but approval is pending.Both experts do not see any negatives for the stock if the Ranbaxy deal goes through.

Below is the transcript of Nipun Mehta and Dilip Bhat’s interview with Menaka Doshi, Senthil Chengalvarayan and Anuj Singhal on CNBC-TV18.Menaka: Is Sun Pharma too expensive to buy at this point in time? Mehta: The stock has run up quite a bit but when you look at it purely fundamentally, stock looks still fairly strong. It has got quite a few ANDAs filed, the Taro business is panning out quite well, if you look at the September quarter results – fairly decent, the dermatology business doing reasonably well, the domestic business in the specialty segment doing fairly well. At about 27 times FY15 it is reasonably priced. If you look at it purely from a short-term point of view there might not be too much of significant run up but purely on a fundamental basis the stock looks fairly strong, does warrant a presence in portfolios, has a fair amount of institutional investment as well. However, our sense is despite the run up doesn’t look overly expensive and will continue to attract investor interest. Menaka: It is a great company, great stock – would you buy at these prices though is the question.Mehta: It is purely a time horizon point of view. So, when one looks at it from a one or two year timeframe yes for sure one would look at buying this kind of a stock. Since 2010 close to about 30-35 ANDAs filed in the US. In the pipeline close to about 140 ANDAs that are there. So, when one looks at it from a FY17 point of view which is about 23 times FY17 projected earnings it doesn’t look too expensive. So, depending on the time horizon if you look at it from a one to two year time perspective definitely looks attractive. Senthil: For the moment would it be in your top three if you are building a pharma portfolio? Mehta: For sure yes, in the pharma portfolio it would be in the top three. One needs to look at the midcap space as well within the pharma space but it would definitely be in the top three.Anuj: Yesterday one guest made a point that in last two months it has added one Glenmark in its market cap. We have Glenmark’s market cap of Rs 20000 crore and Sun’s market cap is now approaching Rs 1.9 lakh crore and everything is good at a price. So, would you have courage to buy Sun Pharma at say 28-29 times next year forward earnings? Bhat: I think the fundamentals have been very well brought out by my friend out over here. However, to point out a couple of things, I think the company is sitting on a USD 2 billion of cash and every year they are adding almost about USD 350-400 million of cash. And if you were to add Ranbaxy after the merger, there is still a tremendous scope for even Ranbaxy to improve its margins, almost doubling the margins even if they have to bring it to the industry standard after the merger. However, Sun Pharma needs to be looked from a slightly different perspective. It is in the same league as that of say HDFC, HDFC Bank, ITC, Hindustan Unilever. So, if you are building your core portfolio it is very difficult to imagine a core portfolio without Sun Pharma. So, then the question comes is whether in the short-term is it expensive? Maybe, but does it matter so much? I don’t think so. I think this is a stock which we will always think of acquiring; even if there is a correction or even if there is a rise we will keep on buying this particular stock. Senthil: If you were to buy today to fill in your pharmaceutical portfolio would you buy it? Bhat: Without any doubt and I would go one step ahead and say if you were to build your top 10 or top 12 stocks across all the sectors, Sun Pharma would also deserve a place in that. So, it has to be seen from that because this is a company which is generating a good amount of free cash and the way they are distributing the dividends, the RoEs and the way the scope is further it may appear expensive but it is a must in your portfolio. Senthil: If you have to pick up three stocks to buy today, pharma stocks would it figure in that? Bhat: Very much, this would be the top stock, maybe Lupin would be the another stock that I would have in my portfolio. Anuj: What about you, what would be your pecking order for pharma stocks? Mehta: It would be Sun Pharma, Lupin and then Aurobindo Pharma. Anuj: In terms of any kind of delay in Ranbaxy’s merger do you expect any kind of negative reaction on the stock or would that not be a point of worry? Mehta: The market has factored in a particular kind of timeframe that is there. So, even if there is a delay we don’t believe there could be a serious concern unless it delays beyond a year or two which is probably unforeseen circumstances. Very clearly with the kind of cash on hand that is there inorganic growth will continue to be serious part of Sun Pharma’s business and that is something that will keep triggering that higher growth that one foresees over the next several years. So, for sure I think Sun Pharma would deserve a place in the portfolio.