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Why pharma stocks may take a breather after recent run-up

In an interview with CNBC-TV18’s Anuj Singhal and Ekta Batra, Surajit Pal, Pharma Analyst, Prabhudas Lilladher, discussed recent developments in the pharma sector and outlined his view on various stocks.

Excerpts from the conversation. Please watch video for the full interview.

Ekta: Lupin has received approval for fenofibrate from the Goa plant. How positive is that?

A: This is positive in a sense previously the media news about those observations so that remains a hangover of the company. I believe that has been a quite a relief so that is a main reason why there is valuation run up is happening.

Anuj: The stock is still eight percent of its previous highs. At current level is the risk reward still favourable or would you advise taking profits after the move like this?

A: Valuation wise and performance wise they continue to be niche for at least next two quarters. Unless and until they have approval in next year which management has indicated to in Q3 or Q4 I don’t think before that the only approval which could drive the valuation is in December end so most of the approval you can expect in Q3 end or Q4. So, that is what I said Q2-Q3 I don’t see any significant approval to come by.

Ekta: Are you as an analyst satisfied with the fact that they received approval from the Goa plant and hence there won’t be any issues according to you in terms of may be the form 483 for the Goa plant and you are satisfied from that perspective?

A: The problem is that US FDA, accordng to its new rule, does not release Form 483 before two months post observing. So, I don’t have those observation at hand so I cannot comment on whether those observations are serious or not.

But given by the approval and the high dependence of Lupin in Goa plant for approval in US market I think it is pretty strong signal for the company. That is the main reason why the valuation is high. I believe that the company continue to be around 24-25 price to earnings (PE) one year forward will maintain.

Anuj: What about the rest of the pharma pack? We have seen big gains across the board in today’s trade and for last two or three days whether it is the likes of Divi’s Lab , Glenmark or Aurobindo even the non index ones what would be your top two or three ideas from the pharma space?

A: I believe that largecap very much in the valuation where it should so, I don’t see very much of high sight in very near to medium term. Even in midcap sector I found Glenmark, Aurobindo Pharma, Jubilant they are my top picks. However, here also run up has happened in a very short span of time. So, I believe overall valuation wise there should be some bit of respite, some bit if stop which is not happening. That is basically run up by the appreciation of dollar.

What we are forgetting is that these companies also have significant exposure in emerging market, which those currencies are actually going down and those companies are also have a dollar exposure to the cost. So overall ultimately these companies always maintain in profitability. Their topline might be blue because of this but overall I don’t see anything significant run up because of dollar price appreciation.

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