Rakesh Jhunjhunwala’s recommendations fall on deaf ears …
One of the paradoxes of life is that despite Rakesh Jhunjhunwala’s status as a self-made 2x Billionaire, novice investors are loath to listen to his advice and follow his recommendations.
Probably, the Badshah’s stature and achievements are so incredible that the novices feel that they will never be able to emulate them and so there is no point in listening to him.
… while Porinju Veliyath’s recommendations are listened to with rapt attention
In sharp contrast, the novices pay close attention to Porinju and diligently follow his instructions.
Probably, Porinju’s down-to-earth and humble attitude strikes a chord with the novices and they feel inspired to walk in his footsteps.
One can gauge the extent of Porinju’s popularity amongst the masses from the fact that his follower base on twitter is close to 3,00,000.
This is an awesome achievement by any standard.
Porinju cleverly keeps his followers engaged by feeding them periodic tidbits about his past recommendations that have become multibaggers and of stocks that are ripe for a buy now.
Pharma stocks are a “lottery” with zero risk and high reward
Rakesh Jhunjhunwala has deep affection for Pharma stocks because they have contributed in a major way to his status of a 2x Billionaire.
In an attempt to inspire novices to buy Pharma stocks, he described them as an “absolute lottery”. The logic is that the risks are minimal while the gains can be manifold.
“I am bullish on pharma… Indian pharma supplies 40 per cent of American generics and 7 per cent value …. If this 40 per cent becomes 50 per cent and we have to go up in the value chain, what is going to happen? We should understand that Indian costs are very low, Indian companies are getting size, Indian entrepreneurs have understood the market. Why will these companies not grow? The whole market is an absolute lottery”.
Latest stock purchases of Rakesh Jhunjhunwala include Pharma stocks
It is not a coincidence that most of Rakesh Jhunjhunwala’s latest stock picks have been Pharma stocks.
He increased his stake in Aurobindo Pharma from 63,50,000 shares as of March 2017 to 65,50,000 shares as of June 2017.
He bought 20,00,000 shares of Jubilant Life as of 30th June 2017.
He bought 45,00,000 shares of Fortis Healthcare on 22nd August 2017.
These purchases have sent the clear signal that Rakesh Jhunjhunwala believes that the Pharma sector has bottomed out or is close to bottoming out and that it is the time to be a contrarian purchaser.
Pharma stocks have corrected to rational levels and are a good buy now: Porinju Veliyath
Porinju has obviously been paying close attention to the sayings and doings of the Badshah of Dalal Street.
He has now expressed the view that the time is ripe to buy Pharma stocks on the basis that (i) they have global competitive advantages, (ii) the valuations are reasonable and (iii) there is an inflection point in the sense that the USFDA regulations have made them stronger and resilient.
Indian Pharma biz has global competitive advantage, long way to go; stocks have corrected to rational levels. Looks like an inflection point
— Porinju Veliyath (@porinju) August 24, 2017
It is worth recalling that Porinju has personal experience with Pharma stocks and has made a fortune out of stocks like Biocon and Jubilant Life.
In fact, Porinju publicly recommended Biocon in January 2016 and called it a “great pick” and “high conviction bet”.
— Porinju Veliyath (@porinju) January 6, 2016
At that time, the recommendation was very surprising because leading experts like CLSA had predicted doomsday for the stock.
CLSA On Biocon: Maintain Sell Call; Target Increased To Rs 440 From Rs 400/Sh
— CNBC-TV18 (@CNBCTV18Live) April 28, 2016
Such was the dreaded impact of CLSA’s doomsday call that Kiran Mazumdar, the dynamic promoter of Biocon, felt compelled to discredit them publicly.
CLSA "sell" report on Biocon is illogical n reflects poor understanding of huge opp for Biosimilars Axis has a "Buy" on Biocon on same .
— Kiran Mazumdar Shaw (@kiranshaw) January 6, 2016
Even Daljeet Kohli, who has a deep understanding of Pharma stocks, called Biocon an “overbought trade”.
Fortunately, Porinju had the last laugh because Biocon surged like a rocket owing to stellar operational results and vindicated his buy recommendation.
Even at the CMP of Rs. 340 (post bonus), the stock is up 90% since Porinju’s recommendation.
He rightly mocked CLSA for their amateurish sell recommendation:
Biocon announces 2:1 Bonus to help CLSA achieve it's target? think twice before making 'SELL' calls in world's most dynamic economy! https://t.co/PVuHjPbWZT
— Porinju Veliyath (@porinju) April 27, 2017
Shocking underperformance of Nifty Pharma Index
Porinju’s recommendation is timely because the Nifty Pharma Index has underperformed in a shocking manner.
Over three years, the Index has lost 11%. The loss over two years is 29.60% while the loss on a YoY basis is 22.80%.
The Nifty Pharma Index comprises of blue-chip stocks such as Aurobindo Pharma, Cadila Health, Cipla, Divis Labs and Dr. Reddy’s Labs.
It is obvious that the underperformance cannot continue forever.
Someday or the other, Pharma stocks are bound to rebound with vengeance.
That time may be now.
Raamdeo Agrawal, Kenneth Andrade, Saurabh Mukherjea and Sanjiv Bhasin also view Pharma stocks as a good buy now
Several eminent experts have united in recommending a buy of Pharma stocks.
Raamdeo Agrawal described them as a “wonderful business”:
“USFDA is a temporary problem. You must not read into anything in the sense that if the importance of size and importance of Indian pharma is growing, they also need to gear up to the required standards of the US.
Indian generics have no global alternatives for the long term. I see a sign of maturity scaling up in Indian pharma. Most pharma companies can throw up wonderful opportunities for investors to buy these stocks 30-40 per cent cheaper if you have faith in them. The business opportunity is beyond doubt because the world needs generics”.
Kenneth Andrade described the valuations as “cheap”:
“In pharma, there is a lot of investment that has gone into the ground. There is a lot of investment. Over the next year or two, if you can get all that investment that has gone into ground at a price, it answers your case. Here I would just like to say you should continue to buy into cheap valuations till that inflection point when growth actually starts coming back“.
Saurabh Mukherjea described Pharma stocks as “solid franchises with long-term credibility”:
“Coming to pharma, the growth template for the future is reasonably clear. Low dependence on the United States and high exposure to Latin America and Africa and again leaving aside the top four pharma stocks, leaving aside the top big four pharma stocks, if we go in midcap pharma, you are able to find names of that sort which have a good footprint in places like LatAm and Africa, have earnings growth between 15% to 20%, healthy balance sheets and valuation multiples which are still reasonable.”
Sanjiv Bhasin called Pharma stocks an “evergreen business” and advised that a “basket” of stocks be bought:
“Pharma is an evergreen business, it is going through the weakness because right now the prices are in your favour and we know the circumstances which have forced that. But if you do not buy a basket then may be two can outperform or two can underperform, the idea is to make pharma your asset class for the next six months because this consolidation in the market can last right up till August September. Pharma can be a very good conduit for playing the market and with an uptick or any positive from FDA, there’s a possibility that almost 2200 patents will come on in the next six to nine months”.
Which are the best Pharma stocks to buy now?
Unfortunately, Porinju has kept a tight lip about the Pharma stocks that are ripe for a buy.
This has left us groping in the dark.
It would have been better if he had spoon-fed us with the names of specific stocks.
What about the Pharma stocks in Porinju Veliyath’s portfolio?
A close study of Porinju’s latest portfolio reveals that he has invested in a few Pharma stocks.
He holds 1,04,836 shares in a nano-cap named Pranax Lab Ltd.
The market capitalisation of Pranax Lab Ltd is only Rs. 49.88 crore.
Yet another nano-cap named Alpa Labs had enticed Shilpa Porinju Veliyath to invest in it through a bulk deal though it is not known whether the holding continues as of date.
BDH Industries, also a nano-cap, has won Porinju’s confidence and he holds 58,000 shares in it.
Equity Intelligence, his PMS, held a chunk in Vista Pharma, also an ultra micro-cap, as of 31st March 2017. The present status is not known.
Porinju has not publicly discussed any of these nano-caps and it would be best for us to stay away from them.
Better to buy ‘100-bagger’ Pharma stocks?
Prima facie, it would be sensible for us to invest in the two mid-cap Pharma stocks which have been described as potential “100-baggers” owing to the quality of management, high return ratios, potential for growth etc.
Granules India – target price Rs. 228 (88% upside)
Granules India has been strongly recommended by Edelweiss, Motilal Oswal and HDFC Securities.
Edelweiss has claimed that Granules is “at the cusp of a new growth story” and projected a target price of Rs. 228 which is a 88% upside from the CMP of Rs. 125.
Motilal Oswal has opined that the stock is a strong buy on the back of “strong growth and multiple re-rating”. The target price of Rs. 200 offers an upside of 60%.
HDFC Securities has expressed similar sentiments and projected a target price of Rs. 185 which is a hefty upside of 46%.
Shilpa Medicare – target price Rs. 805 (24% upside)
Shilpa Medicare is equally a powerhouse stock which can be trusted to fill our portfolios with mega gains.
Tushar Manudhane of Motilal Oswal has issued an initiating coverage report in which he has explained why the stock is a compelling buy now.
The logic is succinct and convincing:
“Product approvals, superior execution to drive earnings
– Shilpa Medicare (SLPA) has been engaged in the manufacture of active pharmaceutical ingredients (APIs) since 1987. However, over a period of time, it has shifted its focus toward creating a niche in Oncology generics. In the process, it has developed a strong capability in manufacturing oncology APIs and formulations. Besides this, SLPA is investing in novel drug delivery systems (NDDS) and biotechnology.
– We believe that SLPA is well poised to deliver robust earnings CAGR of 41% over FY17-20, led by the commencement of sales in the US market and new product launches in the EU market. SLPA has a healthy pipeline of ~23 pending ANDAs (owned and for partners combined). We expect US sales to reach INR3.3b from INR250m in FY17. There is potential in US sales to grow 50% YoY in FY20, subject to outcome of litigation.
– SLPA has the necessary manufacturing capacity and US FDA clearances to succeed in APIs and formulations. It has done well on the compliance part in recent past.
– We expect its base business (CRAMS for ICE, Italy), which currently forms 52% of total sales, to remain stable and sustainable following 20% CAGR over FY15-17. The switchover of sourcing to SLPA led such strong growth. SLPA’s customer, ICE, has been enjoying majority share in this product due to complexity associated with sourcing of raw material. With JV formation with ICE for this business, we believe, SLPA to have 13% CAGR in revenues to INR6.4bn over FY17-20.
– We expect SLPA’s oncology API business, which currently forms 33% of total sales, to grow at 20% CAGR over FY17-20 to INR4.9bn led by increased market share in existing products and new product launches by its customers.
– The five-year average P/E for SLPA stands at 21x. P/E multiples for many pharma companies are lowered due to slowdown in the US business on account of regulatory hurdles/pricing pressure in the base business. However, we value SLPA at a premium valuation of 25x 12M forward earnings due to strong growth visibility from the US market, backed by a healthy product pipeline, which would also support margins improvement. In addition, SLPA has successful compliance history which has become critical factor to succeed in US market. On overall basis, we expect revenue and PAT CAGR of 29% and 41% over FY17-20E.
– We thus initiate coverage on SLPA with a Buy rating and a price target of INR805 on 12M forward earnings.”
Is Aurobindo Pharma a good buy as well?
Aurobindo Pharma is Rakesh Jhunjhunwala’s favourite Pharma stock.
The stock has given him magnificent 8x multibagger gains within a short period of a couple of years.
He increased his stake in Aurobindo Pharma from 63,50,000 shares as of March 2017 to 65,50,000 shares as of June 2017, which implies that more gains are due from the stock.
Aurobindo is strongly recommended by leading experts such as Daljeet Kohli, Centurm, Motilal Oswal, ICICI-Direct, Khambatta Securities and Axis Direct.
The target price is up to Rs. 1,054 and has significant upside potential.
It would be naïve on our part to ignore the unanimous advice offered by leading experts like Rakesh Jhunjhunwala, Raamdeo Agrawal, Kenneth Andrade, Saurabh Mukherjea, Sanjiv Bhasin and Porinju Veliyath. We should tuck into one or more top-quality Pharma stocks ASAP before they run away out of reach and leave us with a sorry face!