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Cipla: Consistency pays off!
Jul 15, 2005

Despite VAT and excise related issues, which have plagued most of its peers in the pharmaceutical industry, Cipla’s topline and bottomline has continued to grow at a healthy pace. In this article, we take a look at the company’s past performance and what lies for it in the future.

Company background
Cipla is the largest pharma company in the retail market according to the latest ORG survey. The company has presence in formulations and bulk drugs manufacturing. All the bulk drug manufacturing facilities of the company have been approved by the US FDA and the formulation facilities have been approved by the Medicine Control Agency (UK), the Medicine Control Council (South Africa), the Therapeutic Goods Administration (Australia) and other international agencies. On the exports front, the company has strategic alliance with major generic manufactures such as Watson, Mylan, Barr and Ivax for supply of bulk drugs. It has a very wide product range in the domestic market, which includes antibiotics, anti-bacterial, anti-asthmatics, anti-inflammatory, antiretroviral, anti-cancer and cardiovascular. The company also concentrates on developing specialty bulk drugs for export markets.

A look at the numbers
  FY02 FY03 FY04 FY05 CAGR (%)*
Net sales growth 31.8% 12.8% 28.2% 21.7% 23.4%
Operating profit margin 22.7% 20.4% 18.4% 22.1%  
Operating profit growth 34.4% 1.3% 15.4% 46.6% 23.2%
Net profit margin 18.4% 17.2% 16.6% 18.1%  
Net profit growth 31.1% 5.4% 23.9% 32.5% 22.7%
* since FY01

Going back in time
Banking on revenues:Cipla has maintained a stable growth rate in revenues, which can be gauged by the fact that the same has grown at a CAGR of 23% between FY01 and FY05, outperforming the single-digit growth of the domestic pharma industry. As far as the therapeutic segments are concerned, the company has continued to dominate the anti-asthma segment, which constitutes over 20% of the company’s revenues. Cipla is also one of the few companies in the world who have the technology to manufacture CFC-free inhalers. With CFC (Chlorofluorocarbons) inhalers to be compulsorily phased out by 2010, this segment is expected to see growth in the future.

Exports have driven growth: Exports have grown at a CAGR of 50% in last 6 years (till FY05). The contribution of exports has gone up to 44% of revenues in FY05 from 19% in FY98. Apart from developing markets, Cipla has also been focusing on regulated markets for growth. Over the years, the company has increased its exports of formulations, which give higher margins as compared to bulk drug exports. Cipla now exports its formulations to over 140 countries in North and South America, Europe, Africa, Middle East, Asia and Australia.

Global strategy has paid off: Rather than launch generic products on its own in the regulated markets, Cipla has adopted the strategy of tying up with companies well established in the generics market such as Watson, Mylan, Barr and Ivax for the purpose of supplying bulk drugs to them. Thus the company has obviated the need to incur heavily in R&D. This has enabled it to consistently maintain its operating margins above the 20% levels.

Cost breakup
(% of sales) FY01 FY02 FY03 FY04 FY05
Material cost 50.3% 47.5% 49.8% 53.6% 49.0%
Staff cost 5.2% 5.0% 5.1% 5.2% 5.2%
Other expenses 22.3% 24.8% 24.7% 22.9% 23.7%

Operating margins and profitability: There has been a consistency in Cipla’s operating margins over the last 5 years, which can be gauged by the fact that both operating and net profits have registered a robust 23% CAGR between FY01 and FY05. Strong growth in revenues, buoyant export growth and tight control over costs has contributed to this healthy growth.

R&D laggard: Cipla has been conservative on the R&D front, as it has focused mainly on its reverse engineering skills to launch its products. The company has so far enjoyed a track record of launching new products faster than any other of its competitor in the high value therapeutic segments. However, with the advent of the product patent regime in 2005, the scale of new product launches is likely to be reduced. Though the company will not be adversely affected by the WTO norms in the immediate future, from a long-term perspective, its R&D lag is likely to be an area of concern. To throw further light, the average spend in the R&D activities has been around 4% of revenues, as compared to 7%-8% spending by other Indian pharma companies and 15% by global pharma majors.

What to expect?
At Rs 319, the stock is trading at a price to earnings multiple of 17 times our estimated FY07 earnings. Cipla is significantly increasing its international operations and we believe that, on the exports front, the company will be a strong performer due to its long standing in the industry and technological skills. Also, being one of the most efficient producers of bulk drugs, Cipla is likely to maintain margins in the international markets, where it has adopted a low risk strategy of supplying bulk drugs to generic companies like Ivax and Watson. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands.

We had recommended a ‘Buy’ on the stock in May 2005 at Rs 272 with a target price of Rs 442 from a long-term perspective. Considering the current growth momentum and bright future prospects of the company, we maintain our view on the stock.

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