Atul Suri, Rakesh Jhunjhunwala’s right hand man (on the technicals side), once rightly said that stocks in the Pharma sector make the ideal investment because of their steady growth trajectory and ultra-low volatility. Pharma stocks have effortlessly become super-duper multibaggers over the years and will continue to show stellar performance even in the foreseeable future, Atul Suri emphasized.
Rakesh Jhunjhunwala, the Badshah of Dalal Street, is obviously a believer in this theory. His portfolio comprises of three top-quality Pharma stocks. The flagship of the portfolio is Lupin, of which the Badshah holds 65,27,605 shares, worth a mind-boggling Rs. 1213 crore. Aurobindo Pharma is the next crown jewel stock of which the Badshah holds 40,00,000 shares worth Rs. 289 crore. The third is Fortis Healthcare. The Badshah holds 50,00,000 shares worth Rs. 78 crore.
It is unbelievable that Aurobindo Pharma has been an 8-bagger for Rakesh Jhunjhunwala in just 24 months. The Badshah revealed that he had bought Aurobindo Pharma in an interview to moneycontrol on 07.09.2013. He said “I have bought some Aurobindo Pharma. I am very bullish on it”.
There is evidence to show that Rakesh Jhunjhunwala bought Aurobindo Pharma even earlier because in June 2013, he was spotted at the company’s investors’ conference grilling the management with some hard questions.
However, even if we take 1st September 2013 as the date of purchase, the Badshah has earned a gain of nearly 700% on his investment in Aurobindo Pharma.
Daljeet Kohli keeps a keen eye on Pharma stocks. His has huge winners to his credit such as Ajanta Pharma, Alembic Pharma, Shilpa Medicare, JB Chemicals etc. As expected, he was among the first to spot the potential of Aurobindo Pharma. He recommended a buy on 7th June 2012 when the stock was available at a throwaway price of 55. Since then, the stock is up an eye-popping 1214%.
Since then, Daljeet has been periodically recommending a buy/ hold of Aurobindo Pharma depending on the valuations. As the stock had run up a bit, he advocated caution. However, in his latest report of 28th August 2015, he has recommended a buy on the basis that:
“Aurobindo Pharma receives USFDA approval for Entecavir Tablets; maintain BUY with price target of Rs 871
USFDA has granted final approval for generic version of Baraclude tablets (0.5mg and 1mg), of Bristol‐Myers Squibb, to Aurobindo Pharma (ARBP). Baraclude is indicated for treatment of chronic Hepatitis B Virus infection of the Liver. The market size of this product is about US$294mn for 12M ending June 2015, as per IMS.
Given the 4 player (including innovator) market, we expect this to be limited competition product for ARBP. Considering 20% market share and 30% price erosion, we expect ARBP to garner US$33mn from this product on annual basis.
At CMP of Rs744, the stock is trading at 20.4x FY16E EPS of Rs36.4 and 17.1x FY17E EPS of Rs 43.6. We consider g Baraclude as limited competition opportunity for ARBP. However, we maintain our estimates for FY16 and FY17 as we have factored the upside to some extent.
We remain positive on ARBP on the back of increased focus on differentiated products, robust ANDA pipeline, ongoing efforts towards turnaround of Actavis as well as Natrol and increased R&D efforts towards peptides, microspheres and hormones. We maintain BUY with price target of Rs871, based on 20x FY17E earnings.”
Ravi Dharmashi of ValueQuest is also a strong believer in the merits of Aurobindo Pharma. He opined that “Aurobindo Pharma’s margins at 19% is a credible performance given that they had a big contribution from one particular drug Cymbalta in the previous quarter. So this is a normalised case of earnings. Now their Europe business is performing at a substandard margins, which is a big kicker. The Europe business can really surprise in Aurobindo’s case.”
Citi Research is most bullish about Aurobindo Pharma’s prospects. It has recommended a buy with a target price of Rs. 1120, which is nearly a 50%+ upside from the CMP of Rs. 724. You can see a talk by Prashant Nair, Citi’s analyst, where he explains why Aurobindo is so alluring.
Bhavesh Gandhi of IIFL is the latest to fall for the charms of Aurobindo Pharma. In his latest report he has recommended a buy on the basis that “We believe company is clearly building a differentiated product portfolio with large sub segments within the complex generics space as mentioned above as well as focus on vaccines (especially PCV which is a limited competition product with US$5bn branded market) and inhalers. We forecast 22% EPS cagr and margin ramp up of ~270bps over FY15‐17E. BUY for a 9‐12mth target of Rs960, based on 24x FY17E EPS.”
At this stage, you must check whether you have any Pharma stocks in your portfolio and whether you have allocated proper funds to these stocks. Assuming you need to add more Pharma stocks to the portfolio, you should also take a look at the four small/ mid-cap stocks recommended by Motilal Oswal as potential “100-baggers” in their 19th Wealth Creation Study. These four stocks are Granules India, Shilpa Medicare, Aarti Drugs and Suven Life Sciences. There are detailed research reports available for each stock which will help to take an informed decision.