Are pharma stocks ready for a rally? Here’s what Devang Mehta has to say

“Sun Pharma is not on my buy list. Companies like Syngene or MNC pharma companies or Dr Lal Path Lab comes to mind immediately, if one wants to get exposure to the healthcare space after this underperformance as well as after underperformance of a lot of businesses or correction for a lot of businesses in the last couple of months,” says Devang Mehta, Head-Equity Advisory, Centrum Wealth Management.

How do you approach Sun Pharma in trade today?
A lot of these businesses in the pharma space and a lot of these generic companies have a lot of suits filed on them, some allegations. Also they have faced the USFDA hurdle two-three years back and have gone through a tough phase. My view is that a lot of these pharma companies, even in the MNC universe and even the generic space including Sun Pharma all probably are right for some bit of a rally.

The overhang on the stock probably gets out of the way now and some fresh buying from a lot of participants who have been waiting for this news could happen. It is not the favourite among the businesses that we buy; there are lot of other businesses in the pharma space which we like but yes the negativity should be out of the way at least for that case.

It almost seems like Invesco is softening their stance on Zee and has decided to withdraw its requisition notice seeking removal of MD and CEO Punit Goenka from the board of ZEE. The Sony deal should go through more smoothly than one anticipated?
I think yes it seems like the stance is now a little more lenient in terms of letting the deal happen. I guess probably the Sony Group came and talked about buying out Zee and if the transaction goes through smoothly, Sony being a large conglomerate in terms of its media holdings, IPRs and all such stuff would make it a stronger group. As the Invesco hurdle moves out of the way, it probably opens the door for a little bit of a rally. I am not saying that it is a buy or sell recommendation because it is too clouded with a lot of news flow rather than any fundamental developments, but if it goes through, the deal augurs very well for the stock in the short and even in the medium term.

What is your call on the Ruchi Soya FPO?
It appears like the FPO would sail through, the anchor investors that participated yesterday are also encouraging the Street and more importantly the business. Right now, such types of businesses are inviting more and more investors. Look at Adani Wilmar IPO listing. Post that, the rally has been exclusive. Ruchi Soya itself is a market leader in terms of its brand Ruchi Gold. Also, it is a very important player in the soybean market, soybean mustard oil and sunflower oil. There is investor interest. Also there is so much inflationary pressure, pressure of the interest rates, commodity prices are rising but yes, some of these companies would command the leadership positions because they are market leaders in their own right.

My sense is this IPO would sail through but there are other businesses which should command more leadership premium. Companies like Britannia, Nestle which underperformed in the last one, one and a half years, when the market was on a risk-on mode, All these companies will have commodity price pressure right from wheat to sugar to other input cost pressure as well.

The market leaders are those that have proved themselves over the last 10-15 years rather than getting into the new sort of trajectory or a territory where raw material pressure could kill some of the brands or not having any sort of pricing power.

What is the right level for you to buy Sun Pharma quite aggressively?
It does not qualify in my buy list at all. So to be very fair, in the last three, four years, we have been very choosy and picky on the pharma side and we still continue to do so. I would not like to give a cliché answer. But if we look at ROE and ROCEs and companies which probably are not the non allied type of businesses, in the last three, four years the company got into litigation in the US but also a lot of other issues as well.

We are into MNC pharma companies like Abbot Laboratories. After the correction, we have also started to buy into Dr Lal Path Labs, a company with 35-40% ROEs, a company which has a larger market share of around Rs 800 revenues per patient. These are some metrics which we like. Apart from it, we also like the CRAM space, where Syngene has been one of the top picks in the last two, three years.

The company has underperformed in the last one year. The pharma companies have also underperformed. So Sun Pharma is not on my buy list at all. Companies like Syngene or MNC pharma companies or Dr Lal Path Lab comes to mind immediately, if one wants to get exposure to the healthcare space after this underperformance as well as after underperformance of a lot of businesses or correction for a lot of businesses in the last couple of months.