Cipla: Low dosage

Special dividend is a positive, but near-term growth concerns in the domestic market persist.

After falling 14 per cent over the last fortnight, Cipla’s stock jumped 4.2 per cent in the last trading sessions, in anticipation that the company will announce a special dividend after its board meeting on Wednesday. While the announcement came on Monday and is positive (the stock closed two per cent higher at Rs 317.30), concerns regarding near-term growth persist.

Cipla has come a long way in 75 years to become a market leader in the domestic anti-asthma, anti-viral, urological segments, with blockbuster products like Ciplox and Norflox. These products contribute about 35 per cent to its domestic revenues and have reached the maturity stage of their product lifecycles. Being promoted through franchisees, they have limited growth prospects. Adding to the woes are the generic products contributing 15 per cent to the domestic revenues, which are barely growing. The silver lining comes from the remaining 50 per cent of revenues, being actively promoted and growing at 18-20 per cent. Thus, overall domestic sales that contributed 46 per cent to consolidated revenues in 2009-10 are likely to grow 10-12 per cent in FY11.

Export formulations and generics hold promise. Export formulations grew 14.4 per cent (Rs 626 crore) in the June quarter, led by anti-asthma and anti-retroviral segments. The company’s betting big on asthama/inhalation products, eyeing a nine per cent increase in Salbutamol shipments to Europe. In addition, Cipla is also launching Salmeterol for Europe to tap the $150-million market. Of eight CFC-free inhalers developed for Europe, six approvals have been filed targeting a $3-billion market. The export segment accounts for half the revenues and will be a strong long-term growth driver.

Looking at the above, the growth for Cipla’s domestic segment remains capped for some time and gains from the international markets are likely to accrue only in 2011-12. The stock trades at 21 times and 17 times its 2010-11 and 2011-12 estimated earnings. While it looks fairly valued from a near-term perspective, investors with a longer-term horizon may consider it, too.