Cipla: A long-term bet

Sanjiv Shankaran

RECOMMENDATION: Cipla, a top rung domestic pharmaceutical company, presently trades around Rs. 777 translating into a price earning multiple (PEM) of about 35 times its 1999-2000 earnings per share (EPS) of Rs. 22.19.

Investors may consider a long-term exposure in the stock because of the company's powerful presence in the domestic market, growing strength in overseas markets and proven skill in research and development (R&D).

BACKGROUND: The major chunk of Cipla's sales, about 85 per cent, comes from formulations (drugs in a ready-to-consume form). The remaining sales come from bulk drugs (ingredients for formulations) which form a significant part of Cipla's export turnover.

In formulations, Cipla's most important therapeutic segments in terms of turnover are anti-biotics and anti-asthmatics. The anti-biotics therapeutic segment has a large share of the market, but realisations in most sub-segments of anti-biotics have been low on account of stiff competition. Over the last few years, Cipla sales turnover from the low yielding anti-biotics have declined, to be gradually replaced by higher yielding segments such as anti-asthmatics.

In the overseas market, Cipla derives a significant proportion of turnover from bulk drugs. The growth in export turnover over the last few years have had a positive impact on the profitability of the company's operations. Export turnover is likely to play a critical role in future too as Cipla plans to exploit the opportunities thrown up the growing market for off-patent drugs in Europe and the US.

FINANCIALS: The aspect that stands out in Cipla's financial statements is the high profit margins over the last five years. The operating profit margins ranged around 27 per cent, while the net profit margins have been around 17 per cent during the last few years.

PROSPECTS: Cipla's share price has registered a steep decline over the last few months to trade at the present level. The decline came after domestic pharmaceutical companies saw their share price rising to new highs on the heels of unwarranted optimism about their R&D potential.

Cipla was one of the companies that saw its stock appreciating during the boom. However, the company's R&D skills- proven will play a critical role in its performance in the market for off-patent drugs abroad.

Not just the overseas market, Cipla's ability to quickly replicate drugs introduced abroad has helped it spread its reach in the domestic market. This is an important determinant for profitability because the returns are usually better for the early entrants.

The company's competitiveness should help it post good growth in the domestic market in the near-term, while the strengths nurtured in the domestic market may help it post big gains in the overseas market over a period of time. The stock is likely to show steady appreciation in the long-term.