Summary of Analysis

Low growth in revenue and profit over last 5 years, high multiple, and regulatory dependence has made Cipla an overpriced stock. This has happened because of the nature of defensive stocks which Cipla will fall into. Our call in Cipla for short term is to wait for few months for the prices to go down and then enter.

In the short term, Cipla price may hover around 250-300. However, its long term story is still robust. Cipla has maintained its margin at a handsome level of 14% to 20% for last 5 years. Going forward, profit margin is expected to remain the same. Investors with longer term horizon can invest in Cipla. With projection of 8% - 11% growth in revenue and net profit over a year, we expect the price of Cipla to be in the range of 300-330 in 1 years’ time.

Stock Summary:

Cipla is available at the PE (TTM) of 22. This is certainly a higher valuation. The PE valuation going forward should be at around 20 in next 1 year. At this multiple, the price of Cipla can touch 300-330.

The Firm & Its Business

Cipla, a pharma company, offers over the counter drugs, prescription drugs and many medicines. The company sells it product over 180 countries in the world. The company is based out of Mumbai and has its manufacturing facility and R&D centre across the country.

The Sector

Pharma sector has done well for last couple of quarters. Despite market beating almost all the sectors, pharma has kept its momentum high. With increased access, Pharma companies are expected to do well in coming quarters. However, the competition is going to be stiff especially since foreign companies are planning to enter Indian drug formulation market through acquisition.

Financials of last 5 years:

Commentary on financials:

Comments on FY2011 data

• Revenue growth in FY2012 is just over 8%. In fact Cipla's revenue growth in last 5 years is not very impressive. The net profit growth in FY2012 compared to FY2011 is 17%.
• The net profit margin has gone up by 120 basis points in FY2012.
• The consolidated EPS for the year FY2012 is Rs 14.00 compared to Rs 11.96 last year.

Positive points on financial trends

• ROE and ROA at 15% to 20% for last 5 years which are above average returns.
• The current ratio and quick ratio are good. The company has enough resources at its disposal to really worry about working capital.
• Debt in the company is negligible.
• Inventory days are consistent in last 5 years. The receivables have improved continuously over the same time.
• The company has paid dividends consistently over last 5 years. The yield is not high though. It is less than 1%.
• The company is generating humongous cash every year from its operation. This makes it a good bet.
• The cost structure of the company hasn't changed much from last year which is a good thing because increase in raw material costs has impacted many companies in the sector.
• Promoters' stake is at 36.80%.

Concern areas of financial trends

• The growth in revenue is not impressive if we take last 5 years data. It stands at 12.88% CAGR in last 5 years. It has shown similar low growth in net profit at a CAGR of 12.51%.
• Net profit margin is good at about 15%.
• PEG ratio at 1.39 shows that the stock is overpriced. The scope of appreciation is less.

Financials for recent quarters

The growth in Mar, 2012 quarter is 6.51% QoQ and 12.72% YoY. Growth has not been very impressive in the last quarter.

Risk

The risk in pharma sector has many dimensions. The most important ones are the following:

US FDA Regulations - This is one of the major risks that many of emerging market pharma companies face. However, most of them have been able to overcome US FDA's stringent requirements.

Patent and Suite - This is another one where emerging market pharma companies have been dragged into.

Short term view

The growth outlook for Cipla for the next quarter doesn't look great. It may grow at the rate of 5%-10%. Cipla has not been performing as expected for last couple of years. The revenue CAGR has been low at close to 12%. The short term view on Cipla is not encouraging. Growth of 12% with a PE ratio of 22 is not attractive for investors. Cipla price will go down in near term. The price is expected to go down by 10 – 15% as the valuation is relatively higher.

Long Term View

Cipla has tremendous capacity, a diverse R&D centre and a presence in many countries around the world. Our long term view of Cipla is that it will be able to provide above average returns in coming years. Recently Cipla changed its strategy to focus on high margin products and this has paid off well in Mar, 2012 quarter. Hopefully, this will continue.

Disclaimer

The data is taken from publicly available sources such as NSE, company website, and few finance portal such as moneycontrol, HDFC securities, ICICI direct etc. Investors are requested to go by their own judgement.