Margin gain remains a key trigger for Cipla, say analysts

Despite strong domestic growth and improving US prospects, analysts remain sceptical on improvement in profitability in the near-term

Shares of Cipla have rebounded about 9 per cent from the lows seen at  January-end, outperforming the BSE Healthcare Index that has risen 4.5 per cent during the period. While these gains have been led by improving growth prospects, further rise will depend on expansion in Cipla’s margins, say analysts. 

On the business front, prospects in the domestic markets (about 40 per cent of overall revenue) remain robust. Cipla’s leadership in the high-margin respiratory portfolio and fast-growing segments such as gastro, gynaecology, and neurology also points to a firm outlook. 

With improved field force productivity and new launches, analysts at ICICI Securities estimate Cipla’s domestic sales to continue growing at 10 per cent annually during FY18-21.

Growth in its US business, too, has been healthy, as was evident from the 9 per cent sequential growth it reported during the December 2018 quarter. 

In fact, the US operations have also been transformed into a front-end based model. In other geographies, Cipla is moving away from the tender-based model, which typically earns lower margins. 

Its acquisition of US-based InvaGen was done with a view to strengthen its front-ended operations, and has indeed helped Cipla. 

The firm has gradually shifted from low-margin and lumpy HIV and other tender businesses to more lucrative respiratory and other opportunities in the US and Europe, say analysts who see these moves in a positive light. 

Concerns, however, remain on the margin front. The tender business and emerging market sales are expected to remain soft in the near term, with the US business and Africa sales seen aiding growth. 

Though Cipla has maintained growth expectations for its US business, and expects the South Africa market to offset tender pricing, profitability is a worry. 

Analysts at Jefferies say, “While US sales have seen a pick-up, it has been below expectation and failed to drive margin improvement.” 

Cipla’s earnings before interest, tax, depreciation and amortisation margins had improved 170 basis points to 18.6 per cent year-on-year in 2017-18. However, the first nine months of 2018-19 (FY19) have seen margins come at 18.4 per cent. 

Analysts at ICICI Securities, Jefferies, and Edelweiss have lowered their FY19 margin estimates, which now range from 17.2-17.8 per cent. It is due to the margin constraints that their target prices do not indicate a significant upside from current levels.

The transformation across geographies from tender-based business to public model is likely to continue for some time, say analysts at ICICI Securities, who see this as having implications on margins initially.