International boost for Cipla

Last Updated: Tue, Dec 04, 2012 03:15 hrs

Cipla's stock, which has been on an uptrend in the past five-six weeks, scaled to its all-time high of Rs 416.85 on Monday, which follows its 2.2 per cent rise last Friday when the company announced the $40-million order secured by Cipla-Medpro for supply of HIV drugs in South Africa. The stock has surged more than 37 per cent since its lows of Rs 302.25 on June 11 on the back of better revenue visibility, especially from international markets. Notably, there are more gains in the offing, thanks to the change in company's strategy in the international business.

While Cipla's domestic segment saw better growth due to the uptick in the acute product range that benefitted the industry as a whole, it is the international business that has made the difference. Cipla has cautiously moved away from low-margin supplies of anti-retroviral (HIV cure) products that were tender based. The September quarters' performance holds testimony to the fact. Exports of formulations grew by 38.2 per cent year-on-year during the September quarter to Rs 1,039 crore.

Analysts at Karvy observe that change in product mix from ARV's to therapies like anti-depressant have given better pricing power to the company. The company has taken price increases across therapies and markets. Monica Joshi at Avendus adds that the portfolio re-alignments and rationalisation in low-margin export business is likely to push Cipla on structurally higher margins compared to earlier years.

Not only has Cipla secured some good long-term supply agreements, it also has gone for more ANDA filings in the regulated global markets on its own. The management post-September quarter results observed that the company has filed for four product launches in past six months in the US market. Amongst supply tie-ups, its agreement with Teva for antidepressant drug, Escitalopram, which the latter had launched on exclusivity in March, has been one of the major growth drivers in past two quarters. While revenues from Escitalopram may decline as the exclusivity period gets over and competition sets, there is another allergic Rhinitis product Dymista that can push revenues. Cipla is the development and manufacturing partner of Swedish company Meda for Dymista. Meda has FDA approvals for the launch of the same and analysts at Karvy estimate $35 million sales from the product for Cipla during FY14.

In Rs crore FY12 FY13E FY14E
Net sales 6,993 8,207 9,393
% change y-o-y 10.7 17.4 14.5
Ebitda 1,597 2,203 2,428
% change y-o-y 20.9 38.0 10.0
Ebitda (%) 22.8 26.8 25.8
Net profit 1,124 1,565 1,767
% change y-o-y 16.3 39.2 13.0
EPS (Rs) 14.0 19.5 22.0
PE (x) 29.5 21.2 18.8
E: Estimates Source: HSBC Research & CapitalinePlus

Apart from these developments, Cipla has taken a major strategic step by going for majority stake (51 per cent) in Cipla-Medpro South Africa. This is Cipla's first international foray towards having its own front-end in the high-potential South African market, which also accounts for 40 per cent of Cipla's export revenues. The company is to shell out $220 million for the acquisition. While analysts at HSBC see Cipla valuing Cipla-Medpro at 1.7 times sales, eight times Ebitda and 10 times trailing 12-month earnings, they add the consolidation of Cipla-Medpro would be EPS accretive from first year to the tune of Rs 0.2-0.3 per share.

Analysts at Morgan Stanley, which also estimate this deal to be EPS accretive, observe that it will help Cipla improve its truncated business model with high dependence on its partners for international marketing and sales. The announcement follows the recent decision to hire senior professional in Europe (Frank Peters) and a change in its strategy to file its own ANDAs in the US. The analysts, however, expect these changes to benefit only in the longer term. They retain their 'overweight' rating on the stock in view of the earnings momentum, ramp-up at Indore SEZ, some international product optionality (including Dymista and European inhaler opportunity) and reasonable valuation.

Majority (33 out of 51 analysts) according to Bloomberg data have 'Buy' rating with 15 having 'Hold' on the stock.

On the downside, the risk to Cipla comes from the drug pricing policy. Hitesh Mahida at Fortune Research feels that the implementation of the same can impact Cipla's operating performance by six per cent.

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