While the next few quarters could see margin pressures and slower export growth, opportunities in CFC-free inhalers growth up of its Indore SEZ will drive growth in the longer term
Cipla’s stock has fallen 14 per cent from its 52-week high of Rs 359 on February 7, 2012 on slower exports in the December quarter, muted export guidance of 10 per cent for the coming quarter, and demand notice of Rs 424 crore by the sector regulator for overpricing of drugs. While its December quarter results, announced on February 13, were largely in line with expectations, the margin improvement seen during the first two quarters of FY12 was also not sustained. Cipla’s large Special Economic Zone (SEZ) at Indore, which became operational in FY11, was unable to provide boost to its exports. What’s more, Cipla did not provide any guidance on the timeline for the SEZ getting USFDA approval, which suggests it may be some time before the SEZ starts contributing meaningfully.
Given these near-term issues, the stock may drift towards the lower end of its 30-month range of Rs 275-385. However, Cipla’s longer-term prospects remain healthy. A strong inhalation range (with a large potential market) is expected to provide the much-desired boost to Cipla’s international business. Margins, too, are expected to inch up, aided by initiatives undertaken by the company, say analysts. Thus, many of them expect the stock (now at Rs 308) to deliver healthy returns from a one- to three-year perspective.
Pressure on margins
Cipla had seen regular drop in earnings before interest, depreciation, taxes and amortisation (Ebitda) margins throughout FY11 (from 24.6 per cent in June 2010 quarter; see chart) due to higher fixed costs on the new Indore SEZ. However, beginning the June 2011 quarter, it reported an improvement in margins, raising hopes of investors that the worst was over. The sequential drop in margins by 230 basis points in the December 2011 quarter (despite Indore SEZ contributing seven per cent to overall revenues) was, thus, disappointing.
| STRONG PROFIT GROWTH | |||
| In Rs crore | FY2011 | FY2012E | FY2013E |
| Revenue | 6,130 | 6,955 | 8,009 |
| Y-o-Y change (%) | 14.4 | 13.5 | 15.2 |
| Ebitda | 1,157 | 1,572 | 1,871 |
| Ebitda(%) | 18.9 | 22.6 | 23.4 |
| Net profit | 990 | 1,125 | 1,349 |
| Y-o-Y change (%) | -8.6 | 13.6 | 19.9 |
| EPS (Rs ) | 12.3 | 14 | 16.8 |
| PE (x) | 25.0 | 22.0 | 18.3 |
| E: Estimates Source: CapitaLine Plus , Bloomberg, Analyst reports | |||
Analysts at Citi observe the quarterly volatility in margins, despite positive drivers in the form of higher share of India business, and a pick-up in sales from the Indore SEZ, as well as a weak rupee, appear to indicate the sudden spike in September quarter margins was more a function of quarterly lumpiness than any structural improvement. Analysts at Motilal Oswal Securities estimate a further decline in Ebitda margins (19.5 per cent) for the March 2012 quarter.
Sluggish export growth
On the revenue, the domestic segment (45 per cent of revenues), which had seen single-digit growth in the first two quarters of FY12, has bounced back with an 18 per cent year-on-year growth in the December 2011 quarter. However, though some boost to API (active pharmaceutical ingredient) export was provided by the anti-retrovial (HIV drugs) segment, formulations exports grew by just nine per cent year-on-year (down seven per cent sequentially). The Indore SEZ contributed a mere seven per cent to overall revenues (Rs 130 crore). With the management’s guidance of just 10 per cent growth in exports for FY12, contribution from this facility may remain limited in the near term.
Growth drivers, but in longer term
Surjit Pal of Elara Capital observes export formulations from the Indore facility would be restricted due to limited API supply. The current capex on API plants would help the company in backward integration of the Indore facility in the medium term. “We believe Cipla would realise operating leverage from Indore SEZ plant over a period of time,” says Pal. Analysts at Standard Chartered Equity Research, too, believe operating leverage is likely to play out in the next few quarters.
Margins, too, should get further support, albeit over the next few quarters, from the initiatives undertaken by the management. The subdued export growth is partly due to the company continuing to rationalise across its business (both products and markets) with an aim to improve profitability, observe analysts.
The bigger boost though would come from the CFC-free inhalers segment, which offers strong growth opportunities. Cipla had filed for 11 different inhalers in Europe, of which it has received approval for only four. Approvals for the remaining ones are likely to take about two years. Management expects the full range to be launched in Europe over next two to three years.
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Some combination inhalers have been launched in Russia, CIS and South Africa. Reports indicate Cipla, lately, has joined hands with Teva, which will be selling Seroflo brands of inhalers in the Russian market to start with. The marketing alliance may be expanded to other countries also, though more clarity is desired, including on the launches in the US. Some upside may come from approval of generics of Seretide (GSK’s combination inhaler) for Europe, but not before the second half of FY13, say analysts.
Additionally, in a recent report, analysts at RBS say Cipla is getting closer in monetising its inhaler opportunity in EU with Advair (for treating asthma) reaching advance stages of clinical trials. “This could mean a potential launch in 2013 in the limited competition Advair Europe market with branded sales of $2.5 billion.” They add, “The approval of generic Advair in Europe could boost Cipla’s revenues (currently not built in our estimates) by $200 million (assuming 60 per cent pricing erosion and 20 per cent market share in 12-18 months post-launch).”