Luther wanted a secular government, not a theocracy, though in the 16th century "secular government" meant something quite different than today. If you mean, did Luther want a purely secular government entirely free of all religious influence, with strict separation between church and state? No, and neither did anybody else in the 16th century. Such a thing was simply unheard of.

But Luther would have been equally strong against a theocratic government in which church officials wielded political power. That was a reality in some areas, with bishops, cardinals, and the Pope himself possessing significant power in the civil realm. There were some who even held the title "Prince-Bishop" for bishops who were also the political ruler of their territory. The Pope ruled the Papal States in central Italy, which still exist in a remnant today as Vatican City - the Pope is not only the Bishop of Rome and spiritual ruler of the Roman Catholic Church, but he's also the civil head of state in the Vatican.

That is something Luther most certainly opposed. He believed that church leaders should be church leaders, and political leaders should be political leaders, each staying in their own sphere. But he also believed that the political leaders were serving God in their own way by maintaining law and order, justice, etc., and it was simply a given that the laws of the state should reflect Christian morality and teachings.

Luther's theology is referred to as "Two Kingdoms." The right-hand kingdom is defined by the message of the Gospel, of forgiveness of sins and salvation by God's grace alone through faith alone in Christ alone. The left-hand kingdom is defined by God's righteous Law, and so this includes the worldly rulers, who (as one reads in the Bible in Romans 13 and 1 Peter 3) are also God's servants for good, and teaches Christian obedience to civil authority. It's not a separation of church and state in any modern conception of that term, because both the right-hand and left-hand kingdoms ultimately belong to God, but it does follow that the same people should not fill both church and political offices.

The Reformation did have one notable event that helped jump-start the development into "separation of church and state", though - after the Religious Peace of Augsburg in 1555, the peace terms included a new principle of cuius regio, eius religio. In other words, the religion of the prince or ruler of any given territory determined the religion of that territory. So if you lived in the territory of a Lutheran prince, all the churches there were Lutherans; if you lived in a place controlled by a Catholic ruler, the churches there were Catholic. Doesn't seem like religious freedom from a modern perspective, and it's not, but it's a milestone in the developmental process that led to modern religious freedom and plurality - for the first time, there was a legal framework in which two different religious groups could exist side by side (just in side-by-side territories, not yet within those territories).

So, tl;dr - neither one nor the other; Luther definitely did not want a theocracy, but also not strictly secular nor a modern understanding of "separation between church and state".