Stock Review: Cipla

While the BSE Healthcare index has gained 2.3 per cent since the beginning of November, Cipla has lost 2.2 per cent. The downslide came with growing concerns on growth opportunities and profitability. Even the double-digit growth of 12 per cent posted by Cipla in the second quarter did not impress investors, as margins came under pressure leading to a 4.6 per cent y-o-y decline in net profit to `263 crore. The top line growth over the next few quarters is also likely to remain capped in this 10-12 per cent range, said analysts at Anand Rathi.

The net revenues of 1,615 crore during the September quarter were primarily aided by a robust growth in domestic formulations, which grew 21 per cent after a lacklustre performance in the past four quarters. However, analysts attribute this growth to ailments associated with an extended monsoon and believe it is not sustainable.

The commercialisation of its new plant at the Indore SEZ helped formulation exports grow 14.1 per cent y-o-y, but this new plant also resulted in higher operating expenses. Besides, the 3.3 per cent rupee appreciation during Q2 also pulled down operating margins down 320 basis points to 22.7 per cent. The Indore SEZ is likely to contribute to a revenue growth but only after all regulatory approvals. However, the approvals may take up to 18 months and till then the estimated expenses of `30 crore every quarter on the SEZ will continue to exert pressure on its margins.

While these concerns continue to weigh on Cipla in the near term, there can be multiple triggers that can help improve its financial performance over the medium term. It has a strong generics pipeline with 22 partnerships for 118 products. Of the 100 approvals that Cipla has filed with the US FDA for generics, 55 medicines are approved, and 35 of these have already been commercialised. Its strong prowess in inhalation therapy for asthma and its pursuit for launching CFC-free inhalers in the US and Europe can be strong long-term triggers.

With adequate manufacturing capacities, strong R&D capabilities and a large range of inhalers, Cipla has a strong potential for entering into longterm supply arrangements with any multinational company. This would provide the drug major strong longterm revenue opportunities. In the past four trading sessions, the Sensex has declined five per cent, while Cipla has gained three per cent and is trading at 21 times the FY12 estimated earnings.