Investment Focus - Cipla: Buy

Investors looking for long-term additions to their portfolio can use the ongoing market correction to accumulate the stock of Cipla. Improving financial performance, better utilisation of its newly set up manufacturing facility at Indore SEZ, besides promising growth prospects make the stock an attractive investment bet. At the current market price of Rs 316, the stock trades at about 20 times its likely FY13 per share earnings. This seems justified considering the company's strong generic pipeline, entry into bio-similars and the likely commercialisation of its CFC-free inhalers in the next couple of years. A manageable debt on its books is also a positive.

In the quarter ended September 2011, Cipla reported a 10 per cent increase in sales to Rs 1,732 crore and 17 per cent increase in profits to Rs 309 crore. While its domestic business grew by about 12 per cent (48 per cent of total sales), exports reported a growth of 9 per cent. Thanks to an improved product mix and higher output at its Indore SEZ facility, the company reported a 2.2 percentage point expansion in operating margins to 24.6 per cent. Notably, Cipla's new facility at Indore SEZ had so far only added to its overheads and had dogged its performance in the last few quarters. The September quarter has seen a significant improvement on this score, with the facility contributing about Rs 150 crore in sales. While these are early signs — it would take a couple of years before the facility reaches optimum utilisation levels — it does reduce uncertainty.

While a strong domestic sales network, and entrenched presence in inhalers and acute/chronic therapies provided Cipla a stronghold in the local market, it is exports that hold the key to future growth. It is currently developing eight CFC-free inhalers for the US and European markets — the management hopes to launch the inhalers in Europe in the next three-four years. It has filed 11 products related to the inhaler business in the EU market and has received four approvals; six are under various stages of processing.

Cipla has maintained its growth guidance of a revenue growth of about 10-12 per cent this year. It expects its bottom-line growth to be in line with its half-year performance (about 8 per cent). The planned higher focus on exports and reduction in sales of its low-margin antiretroviral would help the company improve its margins. While the draft national pharmaceutical pricing policy, if implemented, could affect realisations , the company expects only a 2-3 per cent impact on its domestic sales.

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