Pharmaceutical company Cipla Ltd’s fortunes are set to improve, as the outlook for both domestic and exports growth is looking up, and concerns over Indore Special Economic Zone (SEZ)’s contributions and margin pressures are easing.
While domestic growth has improved during the second half of FY12, analysts see the trend remaining strong in the coming quarters. The Indore SEZ, too, is seeing improving contribution (46 per cent sequential growth in the March quarter). Though ramp-up in the SEZ will be gradual, traction to export growth in the near term will be provided by Escitalopram (an anti-depressant) supplies to Teva Pharmaceutical Industries, that has launched the generics on exclusivity in the US market.
Milestone and royalty incomes from its Sweden-based partner, Meda Pharmaceuticals Inc, which has received approval for launch of an allergic Rhinitis product in the US, will further boost earnings in FY13. In this backdrop, analysts are positive on the stock (now at Rs 309) and expect the company’s earnings to grow at 15-18 per cent during FY12-14. For the stock, which has underperformed peers and the Sensex since the start of 2012, they have a target price of Rs 350, indicating returns of about 15 per cent in nine to 12 months.
| STEADY DOSE OF GROWTH | ||
| In Rs crore | FY12 | FY13E |
| Revenue | 6,977.5 | 8,069.2 |
| % change y-o-y | 10.5 | 15.6 |
| Ebitda | 1,531.4 | 1,893.0 |
| Ebitda margin (%) | 21.9 | 23.5 |
| Adjusted net profit | 1,084.0 | 1,344.0 |
| % change y-o-y | 13.3 | 24.0 |
| EPS (Rs) | 13.5 | 16.7 |
| PE (x) | 22.9 | 18.5 |
| E: Estimates Consolidated financials Source: Edelweiss Securities | ||
Domestic business: Gaining strength
The domestic business that contributes around 45 per cent to Cipla’s revenues had remained below the industry growth of 14 per cent in the first half of FY12. Some spark, however, was seen in the December quarter, when domestic sales grew 18 per cent. This was followed by 16 per cent growth in the March quarter and has provided confidence that domestic growth is back on track.
Praful Bohra at stock broker Nirmal Bang Securities attributes this to field force additions and entry into newer therapies as neurology, psychiatry and oncology. Cipla, which has strong presence in anti-asthmatic segment, has also gained ground in the gynaecology segment. Analysts at Karvy Stock Broking feel Cipla’s pan-India presence with 7,000 field forces and 58 per cent portfolio in the acute segment will be major growth drivers in the future. They add Cipla has been proactive in launches in both these segments, and price-hikes, too, have been undertaken selectively in the respiratory segment. Hitesh Mahida at Fortune Research adds strategic initiatives taken by the company have resulted in the recovery, and, thereby, he expects domestic business to grow at a compound annual growth rate of 14.2 per cent over FY12-14.
Though Cipla’s exports grew in double-digits at 10.1 per cent during FY12, it disappointed analysts, given that the Indore SEZ was already operational (since end-FY11). The higher expenses on the SEZ had led to margin pressure in FY11 and lumpiness continued during FY12. However, the SEZ has started seeing ramp-up and the March 2012 quarter saw its revenue contribution growing to Rs 190 crore, a growth of 46 per cent sequentially, as capacity utilisations touched 40-50 per cent levels. Notably, as Mahida observes, expenses are under control and margin improvement is already visible in FY12 results.
Going ahead, the Indore SEZ, though, will see a gradual growth from here as it still awaits the US Food and Drug Administration’s (FDA) approvals. Also, even though Cipla has already launched four inhalers in Europe, the major boost is expected to come from the FY14 launch of combination inhalers in Europe, following which they will be launched in the US.
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Notably, and for now, boost to exports will come from supplies of Escitalopram to Teva. The latter has launched its branded generic version of Estitalopram on exclusivity in March and Cipla is the supplier of the formulation. Analysts at CLSA see the margins for the formulation supplies to be much better during the exclusivity period. Further, Cipla is likely to launch generics of the Seretide inhaler in FY13, which will provide further boost to exports.
Another growth driver for Cipla’s export will be a combination inhaler ‘Dymista,’ used for treatment of allergic rhinitis. Meda has received USFDA approval for the launch of the same and Cipla is its development and manufacturing partner. Analysts at CLSA observe the product is widely estimated to reach $300-500 million in annual sales over the coming years.
Apart from approval (outside North America)-related milestone payment ($5 million), they expect gradual increase in Cipla’s sales from product related supplies to Meda. Assuming Cipla supplies product at 10-15 per cent of the selling price, Cipla could earn $50-75 million at peak sales.
Weakness in the rupee is further likely to benefit Cipla, which gets over 50 per cent of revenues from exports.