Cipla-Rx For Healthy Returns

Cipla, which started as The Chemical, Industrial & Pharmaceutical Laboratories, has emerged as the largest Indian pharmaceutical company over the last nine months.  Since December 2008, the scrip’s price moved up by two per cent as against the decline of BSE Health index by three per cent. Though FIIs have offloaded some stake during the last couple of quarters, mutual funds and other financial institutions have increased their exposure to the counter.  

Cipla earned most of its revenue from export market and for the nine-month period ending December 2008, exports constituted 54 per cent of sales and posted sales of Rs 2030 crore. It increased by 39 per cent compared to the corresponding quarter last year primarily due to favorable exchange rate and better product mix. The formulation business constituted 84 per cent of the total exports and API was 16 per cent. This growth came despite the slowdown in prescription sales in US, the largest market for pharmaceutical products. 

Moreover, Cipla’s business model is somewhat different from other generic players as it ties up with local players in the international market instead of having a direct presence in the market, making it less vulnerable to generic competition. The company has formed 17 different partnerships for 118 products. But, at the same time, it limits its profit margin. Cipla will receive a boost in the margin from its anti-asthma product where it has a strong presence. This anti-asthma product contributes 25 per cent of the company’s sales and product's market is increasing by 20 per cent per annum. The company is the second largest manufacturer globally in high value aerosol segment and is trying to leverage its leadership position to include higher value products like HFAs (hydro fluoro alkane) to its product portfolio. It has entered into two new partnerships in the HFC inhaler category in US and Canada. Cipla has developed eight anti-asthma inhalers using non-CFC propellants for EU and six have already been submitted. It is currently in the process of developing multi-dose dry powder inhalers too for European markets. 

Performance and Valuation

Cipla is one of the few companies which has a strong and consistent dividend paying history. It is consistently paying dividend since 1990 and for FY08 it was 100 per cent. During the last five years, the company’s top-line has grown by 20 per cent CAGR and bottom-line by 23 per cent. The company has maintained the sales growth for the period ending 9MFY09. It increased by 24 per cent Y-o-Y basis, but net profit declined marginally by one per cent. It was primarily due to increase in other expenses from 35 per cent of sales to 42 per cent. Even interest expenses increased two-fold. At the current market price of Rs 192.25, the company is discounting its last twelve-month earning by 21 times, though it seems pricey at current market conditions, but when we incorporate growth of 23 per cent, PEG ratio comes out to be less than one which shows the company is undervalued. Moreover, there is more earning visibility to the company when compared to other peers Therefore we advise our readers to take exposure in the counter and expect 15 per cent appreciation in next couple of quarters.