Street positive on Cipla despite weak results

Base business growth in the US, and bottoming out of operating-profit margins are key positives

Even though Cipla posted a weak performance for the quarter ended June, thanks to a high base of the year-ago period, there were positives. For one, excluding the impact of sales of esomeprazole (used to treat indigestion; a kind of ulcer in digestive system; and a disease in which stomach acid irritates the food pipe lining) and those of acquired companies, InvaGen Pharmaceuticals, and Exelan Pharmaceuticals, Cipla's base business grew 30 per cent in North America. While majority of analysts think FY17 will see consolidation for the company (after lumpiness in operating-profit margins in the past few quarters on increased expenditure on front-end operations), operating-profit margins may have bottomed out.

Against this backdrop of good news, Cipla's stock jumped over seven per cent to close at Rs 553.5 on Tuesday. The company had posted its June quarter performance after market hours on Friday.

For the June quarter, Cipla's revenue at Rs 2,653 crore was way lower than year-ago quarter's Rs 3,451 crore which had come from sales of Nexium's (esomeprazole)'s generic launch on exclusivity. With no one-off benefit in the June quarter, operating profit fell 42 per cent over a year at Rs 611 crore. Operating-profit margin at 17 per cent was also lower than that of the year-ago period, but in line with the management forecast of 16-18 per cent. The margin could have been higher, but for the Rs 29 crore paid to Teva Pharmaceutical Industries for an oncology product that is to be filed soon, say analysts. Net profit at Rs 365 crore declined 44 per cent over a year.

External factors also played spoilsport, while core operations are improving. Indian business (40 per cent of revenue), for instance, grew only five per cent due to challenges posed by National List of Essential Medicines and banning of 344 fixed-dose combination drugs. The other important geography South Africa (11 per cent of revenue) grew 22 per cent in constant currency terms, with market share increasing to 5.3 from 4.7 per cent last year, due to the setting up of its own front-end.

  In North America (a fifth of revenue), base business growth remains strong. The integration of InvaGen and Exelan is progressing smoothly; this, along with the products acquired from Teva, should drive growth in the US. The company's filings in the US have also ramped up. The bigger boost will come from respiratory product success, which is still awaited and is expected in FY18 and FY19. After results, many analysts have upgraded their ratings for Cipla. But, given the Bloomberg consensus target price of Rs 565, long-term investors could consider the stock on correction.