Stock Review: CIPLA

THE stock of pharma major Cipla has mostly underperformed the ET pharma index in 2010 due to its lacklustre financial performance.

    But, in the past three months, the scrip has gained nearly 15%, beating the 11% return of the index. This is not because of any major fundamental trigger; it has more to do with speculative expectations of stake dilution and major outsourcing deal wins. The company has, however, denied any such developments.

    Cipla is facing headwinds on various counts. Expenses pertaining to the newly-commissioned Indore SEZ and an appreciating rupee have led to margin erosion in the past few quarters. Despite being the secondlargest pharma player in the domestic market, it has lagged the industry growth rate in the last couple of quarters.

    Its formulations business grew at a fast clip of 21% year-on-year in the September quarter, but the company may find it difficult to maintain the momentum due to intense competition from multinationals. Its export business, which accounts for nearly half of the total revenues, is sensitive to rupee appreciation. The technology fees earned by the company are also volatile in nature. They vary between 20% and 40% of the total revenue.

    There is no visible catalyst for Cipla's base business. A ramp-up of the Indore SEZ will take time as it has to get approvals from regulated markets. The launch of combination inhalers in the EU and biosimilars would take 12-15 months. The company has incurred heavy capital expenditure of over . 500 crore annually for the last three years. In FY11, it plans to invest . 500-600 crore more. Despite such an aggressive capex strategy, the management still maintains last year's growth guidance of 8-10% increase in revenues for this fiscal.

    Cipla's stock trades at 30 times its last 12 months' earnings. The valuations are fair, given the company's low-risk partnership-based business model. However, the upside in the stock looks limited in the absence of a fresh trigger.