The Hindu Business Line : Cipla: Buy

AN INVESTMENT can be considered in the stock of Cipla, a leading player in the domestic market, at the current price of Rs 335. At this price, the stock would be available at a multiple of 21 times its expected per share earnings for FY-06.

Our recommendation is a continuation of the bullish stance we have had on the stock since our earlier `buy' call last August, when the stock was trading at about Rs 230.

Though returns have mirrored that delivered by the indices over the past year, we maintain that Cipla, with its de-risked business model, diversified geographical presence and alliances with a multitude of global generic players, represents one of the better plays in the domestic large-cap space.

Cipla put up a good show for the quarter ended June, with the domestic market registering a 12 per cent growth and exports rising 40 per cent. An improvement in the growth rate of domestic operations has to be seen in the context of a recovery in sales in the April-June quarter, after the destocking to by members of trade in the earlier quarter on account of VAT-related issues.

Especially noteworthy is the 52 per cent growth in formulation exports, driven by a strong performance in the anti-cancer, -AIDS and the -asthmatic therapeutic areas.

We also like Cipla's revenue composition, as it does not excessively depend on any one market; for instance, in the latest quarter, exports constitute 42 per cent of all sales.

Unlike Dr Reddy's and Ranbaxy, where a significant presence in the key markets of the US and Europe exposes them to the downside risk of intensifying pricing pressure that is being seen now, Cipla's revenue mix provides a cushion against such an occurrence.

Admittedly, Cipla's business model of having tie-ups with various generic players in the US such as Ivax, Watson and Eon, may not be as lucrative as entering the market directly; however, it does save the company substantially on costs (both filing and legal), which can be quite significant.

Cipla has inked an agreement for over 100 products with various partners, and with approvals for launch likely to come in phases, Cipla's revenue profile also has an element of stability.

With the monsoon in progress, the ensuing quarter should benefit Cipla, as its strength in the antibiotic segment would be an advantage in addressing illnesses that arise on account of seasonality. Inhaler for the treatment of asthma is another strong niche for Cipla. With supplies of chloro-fluoro-carbon (CFC)-free inhalers to Germany having commenced, we expect Cipla to widen its supply footprint across Europe. And with competition in such difficult-to-make products likely to be limited, a scaling up in supplies should lead to an expansion in earnings.

Cipla has commenced production at its facilities at Baddi in Himachal Pradesh and the full tax benefits of the operation are likely to manifest in the quarters ahead.

Cipla is contesting a case involving the pricing regulator (the National Pharmaceutical Pricing Authority) on grounds of having charged prices in excess of those laid down by the regulator.

An adverse ruling by the court in this regard would be the principal downside risk to our recommendation.

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