Stocks in the pharmaceutical sector have witnessed sharp upward movement during the past couple of months on account of sustained buying from both the domestic and foreign funds. These funds have evinced keen interest in the stocks of multinational pharma companies.
The interest in certain domestic pharma stocks also seems to be on the rise. Cipla is one such stock which has witnessed renewed trading interest during the past couple of trading sessions.
Analysts tracking the sector are of the view that Cipla has a diversified portfolio of brands with a leadership position in several segments. "Its earnings CAGR should top 20 per cent over the next three years," said an equity analyst with a European brokerage house.
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Despite the uncertain markets, the share price has witnessed a consistent upward movement. From the low of Rs 839.50 on the BSE on September 21, the stock closed at Rs 895 on Friday (October 9). The stock also touched Rs 899.75 during intra-day trading on Friday.
The company has a net cash balance sheet and a high increasing core ROIC (from the current level of 33 per cent), and it is among the most efficient domestic pharmaceutical companies, states a research report prepared by CSFB Equity Research.
"We believe that Cipla can easily grow its earnings at a 20 per cent CAGR over the next three years without resorting to any acquisitions or adopting any aggressive or risky business strategies. Cipla's historical performance has been far more impressive than our forecasts," says the report.
The company is currently trading at a multiple of 13.2 of its 12-month forward rolling earnings per share. Thus, Cipla is among the least expensive stocks in the pharmaceutical sector. "We believe that the market has started recognising this relative valuation anomaly, and the stock is in the midst of being re-rated," states the report.
However, there still seems to be some concern about the performance of the company with the patent regime staring at the Indian pharma sector. "We believe that devoting resources to a new molecule research is not a sure-shot remedy for Indian pharma companies in a product patent regime. Such an approach requires large investments and experience both of which are lacking in Indian pharma companies. Hence, new molecules are unlikely to be the mainstay of domestic pharma companies after 2005," states the report.
Cipla has been conservative in its strategy of pursuing exports which has meant that, currently, the share of exports in Cipla's sales is lower vis-a-vis its domestic competitors. However, the company has been focusing on exports over the last three years. Exports now account for 15 per cent of the turnover. The company plans to increase this proportion gradually over the coming years.