However, the stock has rebounded about six per cent to Rs 383 after the company sweetened its offer for acquiring full control of South Africa-based Cipla-Medpro. Cipla already holds 49 per cent in it. This has raised hopes of the deal going through soon. Cipla, in November 2012, had offered to buy 51 per cent of Cipla-Medpro at 8.55 rand a share, which it has now raised to 10 rands a share (total offer price $512 million). The deal going through would mean Cipla having its own front-end in the African market that contributes 40 per cent to its export revenues. This is a concrete step and a significant shift in Cipla’s export strategy. So far, Cipla has largely relied on an export model that has mainly focused on supplying low-cost generic drugs to its foreign partners.
Chirag Talati of Espirito Santo, observes, “We have long argued that Cipla’s export formulations business has suffered from neglect over years due to its distributor model in export markets, which resulted in a fractured business model. To that extent, the deal, which values Cipla-Medpro at $512 million (enterprise value: $530 million), is a significant shift in Cipla’s export strategy, with Cipla slated to take control of its largest distributor in a region (South Africa) that has grown six times in the past seven years for Cipla.” The acquisition will also bring certainty over its South African business as all rights to trademarks and dossiers will come to Cipla, he adds. Moreover, analysts estimate the deal will add $365 million to Cipla’s revenues.
The operational synergies not only would allow the company to grow faster but also help improve margins. Margins have been one crucial concern for the market. Even the management in the conference call post December 2012 quarter results had guided for margins of just 22-23 per cent. Thus, the Street’s concerns on margins, too, are getting addressed, say analysts.
Given this scenario, the Medpro deal going through will provide a strong trigger, which along with further inroads (own presence) in other markets, could lead to upgrade of the stock whose target price according to Bloomberg data is Rs 435.45, compared to current levels of Rs 383.