Street cautious on Cipla despite healthy March quarter numbers

Higher competitive intensity, increasing investments, and moderate growth could weigh on returns

Cipla has posted better-than-expected results in the March quarter (Q4), on the back of new product launches in the US market as well as a recovery in its India business. While consolidated revenues grew 19 per cent year-on-year (YoY), margins expanded sharply from the year-ago quarter due to lower costs. 

While the firm is confident of double-digit growth in the US and India, the Street is sceptical about the sustenance of the Q4 performance. The same was reflected in the stock, which closed about 1 per cent down on Wednesday. 

Among the reasons for the strong performance in Q4 was the launch of differentiated products such as the generic version of Sensipar (used in treating overactive parathyroid gland). In addition, the firm has launched and ramped up generic versions of Voltaren (inflammation) and asthama treatment drugs, Pulmicort and Isuprel. 

Analysts say revenue growth in Q4 was led by drugs such as Sensipar, and this revenue stream is volatile and may not sustain in the coming quarters. Higher competitive intensity could also lower returns from the product. 

Its investments in the specialty portfolio may require further fund infusion and thus weigh on cash flows. Cipla, however, expects double-digit growth led by new launches, existing base and market share gains. Given the impairment charge on intangible assets in the US generics business, analysts are wary of future write-downs.  

While the India business growth has been 7 per cent for FY19, it stood at 11 per cent for the March quarter, due to higher chronic therapy growth and improvement in the supply issues that plagued the company in the first half of the year. 

Cipla expects India business growth (estimate of 11 per cent) to beat the sectoral growth in FY20, largely in line with Street estimates. While some segments of the South African market have done well, the tender market, as well as the Global Access business segments, continue to shrink. 

The decline in some of these businesses is expected to continue. India, the US and South Africa, collectively account for 70 per cent of Cipla’s consolidated figures.

While the management has guided for double-digit growth in its key markets, the same is already captured in the valuations.