Pharma stocks now on the radar

STREET CUES

Pharmaceuticals is one of the key theme for 2007 at brokerage houses such as Religare Securities, Angel Broking and Pranav Securities.

Analysts are expecting the sector to report a growth of more than 40 per cent this year with good momentum in branded generics business in India and overseas. Also integration of profitable acquisitions and base effect would help in posting robust growth in 3Q FY07.

However, the US and European generics markets continue to remain challenging for most players. Domestic pharmaceutical companies have been aggressively spending on the R&D activities, which is showing in both the topline and bottomline growth.

Operating profit margin and net profit margin of majority companies would perk up on the back of higher revenues from regulate markets and sales from generic products.

Religare Securities perceives Orchid Chemicals & Pharmaceuticals, a Chennai-based company which focuses on niche products in the antibiotics segment such as Cephalosporin antibiotics and Betalactams, to have an upside of 56 per cent for a holding period of 12 months. Orchid has rapidly evolved into an integrated life science company and also offers non-antibiotic product portfolio.

The company is expected to report a turnover of Rs 106.61 crore in FY07 and Rs117 crore in FY08E. EBIDTA is likely to grow by more than 22 per cent. EPS comes to Rs 15.86 in FY07E and Rs 20.26 in FY08E, which signify a growth of 79 per cent and 28 per cent for FY07 and FY08 respectively.

Ranbaxy ,Cadila Healthcare and Wockhardt are the top stock picks at Angel Broking for the new calendar year.

Sarabjit Kour Nangra, vice-president research, Angel Broking, believes that among large cap companies, Ranbaxy is well placed to ride the generic opportunity and also participate in the consolidation taking place in the Industry. Further at 22xCY2007E and 17xCY2008E earnings she believes that the risk-reward is highly favourable.

Her second choice is Cadila Healthcare as it has a well diversified profile with presence in generics and contract manufacturing space. Cadila's initiatives to enhance the presence in the regulated markets have started fructifying.

Further, the company has de-risked its contract manufacturing business by forming a joint venture with Mayne and Bharat Serums. The company is expected to post 25 per cent CAGR in net profit (excluding the contribution from the new joint ventures) during FY2007-09E.

Wockhardt is Sarabjit's third pick, as over the last few years the company has significantly enhanced its presence in regulated markets, especially Europe through the inorganic route. This has aided robust growth and higher contribution from these markets.

Mumbai-based Pranav Securities is bullish on Dr Reddy's Labs and Nicholas Piramal. "Dr Reddy's after reporting outstanding numbers in H1 FY07, is again well placed to witness robust quarterly numbers for Q3 FY07. We expect the company to report revenues of Rs 176 crore in Q3 FY07, representing a growth of 218 per cent and net profit to grow by 296 per cent YoY during the same period."

Nicholas Piramal is Pranav Securities' second pick. Nicholas Piramal is expected to report a consolidated revenues of Rs 552.8 crore in Q3 FY07 representing a growth of 36.3 per cent YoY.