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Cipla vs Peers

Aug 13, 2004

Cipla has seen a lot of activity over the past one month, and the stock has gained about 15% since July 2004. In the same period, the other two pharma giants, Dr Reddy's and Ranbaxy have gained only 3% and 6% respectively. So what has caught the investor's fancy with regard to Cipla? Let's find out.

Let's consider various business aspects of these three companies.

From the chart above, one can say that Cipla has outperformed both its competitors with the consistency of its growth over a period of time. There was a jump in Cipla's sales in 4QFY04, which was basically led by a significant surge in the bulk drug sales (98% YoY). By increasing the exports business, company has managed to deliver growth. That apart, Cipla has done better than any other player in the domestic markets too, with aggressive product launches in last two years. This strategy is different from the other Indian pharma companies, which are trying to create big but fewer brands, so as to leverage on brand equity post 2005.

Cipla is currently the largest pharma company in domestic retail market according to ORG-MARG survey. However, the other two companies have shown a different picture on growth front. While the growth of Ranbaxy in the aforesaid quarters was fairly consistent, as the drop in sales in US market was compensated by the increase in sales in the European market. Dr Reddy's concentration on Para IV filings has brought down the sales, as it has not got any positive approvals in last two and a half years on that front. Also, increasing competition in generics has brought down the realizations, which has lowered the growth in the revenues.

On margins front too, Cipla must get full marks for the consistency. While margins of the company are less compared to Ranbaxy, it is the consistency in the margin, which is commendable. Although, it is acknowledged by the industry that Cipla is one of the most efficient producer of drugs in the country, the business mix and sales mix is such that the margins are lower compared to Ranbaxy and Dr Reddy's. While the other two companies enjoy higher margins from generics business in the regulated markets, Cipla is focussed on formulation sales in the unregulated markets of India, Middle East, Africa and Eastern Europe and CIS countries.

While margins of Dr Reddy's have been badly beaten for the period under review due to decrease in sales from US generics and increase in R&D expenses, the margins of Ranbaxy have remained steady. The margins of Dr Reddy's and Ranbaxy are dependent on their performance in the highly competitive generics market in Europe and the US, the margins of Cipla are more dependent on Indian markets and the growth of business of bulk drugs, which Cipla sells to other generic manufacturers, like Watson and Ivax.

Going forward, we believe that Cipla will continue to deliver growth both through domestic and international operations. While the growth in topline will be robust, the history of consistency in margins suggests that the topline growth will penetrate down to the bottomline, thus increasing the shareholder value. At a P/E of 22.5x (twelve month trailing EPS), the stock is trading at a discount to Ranbaxy (24.8x) and Dr Reddy's (33.2x).

Cipla's valuations are a little lower than its peers owing to two reasons. For one, if we take a long-term view, you have to look at the sustainability of the business. Here, Cipla may get hit because of its dependence on bulk drugs for growth which are more like commodities and the only advantage company has is its cost competitiveness which can be replicated by other companies over a period of time. Formulations business too is only in unregulated markets, and these markets will soon come under WTO purview, which might influence the company's ability to launch new products in the market. But over the short term, Cipla's business profile and prospects are more visible.

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