IIFL expects good earnings in pharma; picks Glenmark, Cipla

Although the rupee depreciation has been a cause of concern for the economy, pharma companies are going to benefit from it and post good earnings this quarter, believes Bino Pathiparampil, Vice President Research, Institutional Equities, IIFL.

In an interview with CNBC-TV18, Pathiparampil said that he is positive about Glenmark posting a good growth in Q1 and Cipla too has limited downside risk from its current levels. Hence, he advises investors to stay invested in the stock. Apart from these, he picks Dr. Reddy's as a favourable stock.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Let's start with Glenmark. As we kick in the earning season what would be the results you would watch out for, would Glenmark be on your radar for any specific reason? What's your view on the stock?

A: Like all pharma companies Glenmark would also benefit from the deprecation of rupee. If you look at the rupee, it is almost 20% down year on year, compared to the first quarter of last year.

All pharma companies are going to benefit from this and like most other pharma companies I expect Glenmark to post very good growth in the quarter. Part of the reason being rupee depreciation and partly growth in the operating markets of the company.

Q: I just wanted to get your view on Cipla because there is a lot of incremental positive news on Cipla. There have been some recent management changes with regards to hiring an ex-Teva director on board etc. How exactly would you be placed on Cipla going forward, any sort of target prices?

A: I see limited downside to Cipla from these levels. The stock has been not performing in line with its peers but, now I don't see further downside from these levels. In incremental upside, we need to watch out for developments on the company's inhaler pipeline for the European market.

The expected growth in the domestic market as well as other exports market of late has not been as great as we have been expecting for a while. But all that could change if they get a major product approved, major inhaler product approved in the European market which could turnout to be a multi-million product. I would watch out for that and in the meanwhile stay invested in the stock because I see limited downside.

Q: What would be your other pick in the pharmaceutical space, let's start with bigger names, would you be positive on Dr. Reddy's? What are you expecting by way of results performance and stock price movement?

A: Dr. Reddy's is going to see a very good growth here this year. The medium term growth visibility also looks as good as any other pharma peer. But compared to other stocks which have actually done reasonably well over the last 6 months, Dr. Reddy's has not gone up much.

The valuation has corrected significantly and the stock is trading almost at a 15% valuation discount to its peers. Going forward, I would expect that valuation gap to close and that should give some additional return from Dr. Reddy's compared to other peers. Dr. Reddy's is one of the best stocks to own at this price.

Q: One stock which is not spoken about much on the volume charts is Divi's Lab. It's almost like a hidden gem which a lot of analyst refers to it as. What further upside would you see on Divi's Lab and what would your target price be?

A: Divi's Lab performance has been really great. Last year the company grew its profits close to 30%. This year also we are looking towards close to 30% profit growth and a similar kind of growth is possibly sustainable over the next three to four years, at least.

This means that the stock despite having gone up quite a bit can give reasonably good returns. I would expect anything between 20-30% return from the stock on an annual basis.

Q: What about Lupin ? In the last 2 years it has gone up 300%? Is that still good for more gains?

A: Yes, while the company is doing well and earnings growth should continue for Lupin because the stock has gone up quite a bit. I think the returns could be a bit muted from these levels. There may not be a major downside but already a lot of upside is in the price in my opinion.

Q: One more product,  Sun Pharma . That's another roaring story. Does that also go now from strength to strength?

A: What we said for Lupin to a good extent applies to Sun Pharma as well. Probably, if you keep the stock price away and look at just the business performance, Sun is the best company in the space.

It has done really well, has beaten expectations consistently for last 9-10 quarters but, despite that the stock has gone up so much in the last one year that I see limited upside from these levels.

Q: Do you have any picks in the midcap space?

A: In the midcap space both Torrent Pharma and Ipca Labs are very good picks. Ipca continues to give very good growth, 20% plus growth which continues in this year as well. They should also benefit from the depreciation of rupee.

At the same time, Torrent is probably a better company in terms of having better cash flows, better return on capital etc. This quarter may be a bit muted for Torrent because they have a very high base of last year. But if that results in any kind of weakness in the stock, I would look at that as an opportunity to accumulate that stock.