Domestic pharma major, Cipla has seen a sharp rise in its stock price in the past one month. The stock price has gone up from Rs 806 on 1st Aug '03 to Rs 994 on 3rd Sep '03. Infact the stock had almost breached its 52-week high level during this period. But is this upsurge in price driven by fundamentals or is this just another speculative run that will end in the stock prices crashing as quickly as they gained. Let us find out!
Stock price of a company rises when there is a perceived improvement in fundamentals of a company. An improvement in the financial performance which is depicted by the latest results and/or better prospects of the company (which is inferred from the press releases given by the company about their future plans and approvals/contracts that the company has received), can lead to improvement in investor sentiment and trigger a rise in the company's stock price. So what is the reason for an improvement in sentiment towards Cipla?
First, let us take a look at the latest declared financial results of the company.
Operating profits margin (%)
Profit after tax
Net profit margin (%)
No of shares
Diluted earnings per share*
As can be seen from the above table, Cipla has not shown any significant improvement in its financial performance. Although there was a rise in topline and bottomline in 1QFY04 as compared to 1QFY03, operating as well as profit margins of the company have come under pressure. (Detailed review of the 1QFY04 performance) The margins are even lower than what the company recorded in FY03. This is despite the fact that FY03 was not a good year for the domestic pharma industry due to sluggish demand and the VAT fiasco that had severely affected the performance of the company in 4QFY03. Thus, an improvement in the financial performance of the company does not seem to be the likely reason for the sharp rise in the stock prices.
Another possible reason could be a positive press release given by the company regarding a new contract or an approval that the company could have received. However, Cipla's management as a policy provides very little information regarding their future plans. Infact, there has been no news of the R&D progress made by the company for a long time now. Moreover, Cipla has also refrained from giving any time frame within which it expects to receive the requisite approval for the selling CFC-free inhalers in Europe. Hence, this again could not be the reason for an improvement in the market sentiment.
So is the surge in stock price justified?
Cipla is a fundamentally strong company. The company has a strong presence in the domestic market, which is witnessing a steady revival in demand. The expected reduction in DPCO cover is another positive for the company. Even on the exports front, the company has steadily increased its exposure. In FY03, exports accounted for almost 40% of its net sales. Further, Cipla, with its expertise in AIDS drugs, is likely to be the biggest beneficiary if the draft WTO agreement is accepted by all members. Moreover, Cipla has entered into a number of strategic alliances with leading generics companies in the USA and Europe for the supply of bulk drugs. These initiatives and the impending approval of its CFC-free inhalers are expected to be the key export drivers going forward.
However, with product patents being implemented in India post 2005, Cipla's performance in the domestic market could be adversely affected. The uncertainty regarding the implementation of DPCO 2002 could further affect the performance of the company.
At Rs 999, Cipla is trading at a P/E of 22x its 1QFY04 annualised earnings. Although a revival in domestic demand in view of company's strong presence and focus on exports augment well for the company, it does not justify such a sharp rise in price. The recent price upswing appears to be more speculation driven rather than being fundamentally driven. Investors are hence advised to exercise caution and not get carried away by market ‘khabars'. They should stick to the fundamentals of the company while taking any decision. Investing in stocks at 4,000+ levels is not an unwise decision as long as it is made in fundamentally strong companies with good business models. Stock picking needs to be research based and not on an adhoc basis.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407