Financial Daily from THE HINDU group of publications
Sunday, Aug 22, 2004
Financial Daily from THE HINDU group of publications Sunday, Aug 22, 2004 |
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Investment World
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Stocks Markets - Recommendation Cipla: Buy Nath Balakrishnan
On the look out for molecules to drive growth.
Cipla's domestic market franchise is reflected in the 16 per cent revenue growth recorded in the first quarter of FY05. Considering that these numbers are coming off a high base compared to the corresponding previous quarter (an aberration caused by the confusion surrounding the implementation of VAT), they are indeed noteworthy. The growth has been led by the anti-asthma category, which is Cipla's flagship therapeutic area. This, coupled with other therapeutic areas such as antibiotics and anti-virals, should enable Cipla sustain an above-market growth rate. The sharp rise in formulation exports by 60 per cent (at Rs 141.7 crore) is a positive. While a boost in export of formulations should impart an upward bias to margins at the operating level, the same has not been the case with Cipla. Operating margins, at 18.8 per cent, have dipped by 40 basis points on a year-on year basis. This marginal dip in margins has been brought about by a 140-basis-point increase in other expenditure, which, in our view, would have been costs incurred with respect to filings for the regulated market foray. As Cipla gradually ramps up its presence in the US market, the benefits after product launch should outweigh the expenses currently incurred. Though earnings at Rs 79.2 crore registered a 18 per cent increase compared to the corresponding previous period, its rise was tempered by a 370-basis-point increase in the rate of taxation at 24 per cent. This was on account of the withdrawal of tax benefits under 80 HHC, which should remain the norm. However, once the developed market initiative takes off and supplies from Cipla's facility located at Goa commence, there could be a decline in taxation, as against the current levels, which could shore up earnings.
Cipla has tie-ups with prominent generic players such as Ivax, Watson and Morton & Grove Pharma for a clutch of products expected to go generic in the near-to-medium term. The lack of clarity surrounding the products for which the agreements have been inked would render a forecast of the upside potential difficult. Even if one were to assume that these are relatively small-sized opportunities that Cipla would address, the number of products covered under these deals should translate into a significant revenue opportunity. Cipla's model of entering a developed market through the partnering route may not be as financially lucrative as direct entry offers, but it offers a cushion against downside risk that arises when, say, a company loses out on a patent challenge. A couple of other big opportunities that could come Cipla's way is the patent challenge by Ivax on Olanzapine and approvals for the supply of the CFC-free inhalers into the European market. While the outcome in case of the former is unpredictable, timelines in case of the latter are still unclear. Favourable developments on these counts could propel the stock's valuation. The key risks to our recommendation would be a slower-than-expected take-off in the developed market business and any adverse ruling in the litigation on inclusion of certain drugs under price control, which Cipla is contending.
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