Cipla: Poor quarter, but structural triggers in place

The Street took a negative view of Cipla's March performance pushing its stock down 8.1 per cent as compared to 2.7 per cent fall for Sensex since May 29. Cipla's muted sales growth (a rise of five per cent, at Rs 1,910 crore) missed estimates by nine-10 per cent.

The management's forecast of "healthy" double-digit revenue growth in FY14 did little to lift investor sentiment. Analysts estimate revenue growth for FY14 at 14-18 per cent. Nomura analysts believe the Dymista (nasal spray) ramp-up in Europe and its successful launch in the US in FY14, along with the spill-over effect of anti-retroviral contracts (anti-AIDS drugs), would help achieve the expected growth.

At Rs 369, the stock trades at 18.3 times its FY14 estimate, lower than 22 times for peers such as Lupin. The average target price pegged by various analysts is about Rs 440.

Though the performance in the quarter ended March didn't meet expectations and most analysts cut their FY14 estimates, they continued to have a positive outlook on the company. This is because of an increasing front-end presence in key markets, an acquisitions strategy to expand (Medpro is an example), completion of the investment phase resulting in expansion of back-end infrastructure, and expected regulatory approvals for key products.

Piyush Nahar, equity analyst at Jefferies India, believes the increased spend on research and development (by a percentage point of sales) to build its product pipeline, better cost control and margins due to front-end operations in the US and EU, the Medpro acquisition and expansion in emerging markets through acquisitions would provide strong growth drivers over the medium term. He expects a 20 per cent rise in base earnings per share through FY13-FY15.

On the domestic front, the pricing policy, which is expected to deal a Rs 80-crore blow (translating into an earnings-per-share-impact of four per cent), is likely to be a concern, according to Kotak Institutional Equities' analyst Krishna Prasad. Domestic sales growth in the March quarter stood at only five per cent (analysts expected 11 per cent).

For the first nine months of FY13, domestic sales growth was a strong 17 per cent.

Nomura analysts believe greater dependence on generic sales (unlike higher branded sales for peers) led to this volatility. While they say Cipla would be able to match industry growth over the long term, outperformance (in the domestic space) would be difficult, given the company's limited presence in the fast growing chronic space.