Order boost, inhaler sales key triggers for Cipla

Street to keep an eye on margin improvement and launch of combination inhalers

Cipla recently won a two-billion rand (Rs 1,100 crore) order from the South African government to supply antiretroviral drugs (ARVs) used in HIV treatment. The order, spread over 2015-17 is likely to boost revenues to the tune Rs 300 crore a year for its South African subsidiary Medpro. The Durban unit of Medpro remained underutilised and, hence this will improve capacity utilisation.

Kotak Institutional Equities analysts say the facility, underutilised and not equipped to manufacture three-in-one combinations of ARV, has since been upgraded and will help mitigate some of the currency risks. Three-in-one drug combinations (three molecules in single dose capsule/tablets) are high-margin business and will help improve the lower-margin ARV volumes to some extent. Although half the order falls in the three-in-one category are higher-margin, overall ARV tender orders tend to be low-margin ones. The stock has, thus, been flat since the announcement of the order on December 23.

While the recent order and the prospects for the company in the developed markets are sound, the Street is worried about near-term earnings before interest, depreciation, taxes and amortisation (Ebitda) margins, which have been on a continuous decline over the past few quarters. The Ebitda margins at 20.2 per cent in the September 2014 quarter had come 124 basis points lower year-on-year. The lower margins are, however, understandable given the company is setting up its own front-end in countries such as South Africa, leading to higher expenses initially. This will, however, lead to margin improvement later.

The high returns for the stock (45 per cent) over the past six months have been driven by strong growth in the domestic business, which contributes half of Cipla’s current revenues. Also, the respiratory segment (its inhalation range especially combination inhalers) is expected to become a large contributor in coming days as approvals start flowing. In fact, it is the only generic company to launch Advair-metered dose inhalers in the UK during FY15, which has led to Hitesh Mahida of Antique Stock Broking to upgrade his FY16 estimated earnings by 10 per cent.

Cipla remains one of the few companies along with the likes of Sun and Lupin  that will benefit from the current strengthening of dollar. Of overall revenues, 39.5 per cent are in dollar terms, 6.2 per cent in euro, 12.3 per cent in rand and the remaining in rupees.

The trigger for the stock that trades at Rs 622.65 levels is the sales momentum from the respiratory segment. Mahida allocates Rs 66 a share to future combination inhaler launches, which accounts for 11 per  cent in sum-of-the-parts valuation.