CIPLA POISED TO MAINTAIN HIGH GROWTH

Growing well in most geographies; analysts estimate its earnings will grow by over 20% annually during FY18-20

Cipla, which has clocked better returns than most of its larger pharma peers in the past one year, has now outperformed the S&P BSE Sensex in the past one month. It has gained almost 11.5 per cent since the Marchend lows, though its Pithampura unit got three observations from the Food and Drug Administration (FDA), the US drug regulator. The Street is showing confidence in Cipla primarily because of its strong growth prospects. After pegging earnings growth at over 30 per cent in 2017-18 (partly helped by a low base of 2016-17), analysts expect Cipla’s earnings to increase by over 20 per cent each in 2018-19 and 2019-20.

FDA observations not a worry

The company has said the inspections at its Pithampura unit between April 2 and 13 were routine and there have been no data integrity issues or repeat observations. The observations are not likely to have any adverse impact, say the company and analysts. Moreover, the plant does not contribute significantly to the company’s US sales, says an analyst, adding such non-critical observations can be resolved.

Growing well in key markets

Cipla is growing well in most of its key markets, including India other emerging markets and even regulated countries. This should ensure that earnings momentum remains good.

The domestic market, in which the company derives more than 40 per cent of its revenue, had reported about 15 per cent growth during the December quarter, and that was much higher than the increase reported by peers such as Dr Reddy’s Lab, Lupin or Sun Pharma (at 3-8 per cent). Growth is expected to be strong in the March 2017-18 quarter (Q4) as well and in the current financial year. Its presence in the specialty range such as respiratory and oncology is witnessing limited competition, and consequently is highly profitable. Analysts at Motilal Oswal Securities expect the company’s domestic sales to grow 22 per cent year-on-year in the fourth quarter.

The next important growth driver for Cipla remains Africa, which contributes a fifth of its sales. Thanks to its own front-end presence in the continent, the company had seen its highest ever quarterly sales during the December 2017 quarter.

Cipla, which has been a late entrant in the US, is now spreading its wings in the world’s largest health care market. While its small contribution (a fifth) to sales has insulated the company from the impact of drug price erosion, which is hurting other pharma peers having a larger presence in the US, Cipla, with its evolving product pipeline and launches, is seeing a healthy rate of product approvals, which is driving its growth.

Analysts at Motilal Oswal Securities say Cipla is poised to deliver robust growth in the US due to a low base and a significant pick-up in filing for drugs. According to them, Cipla filed 32 ANDAs (abbreviated new drug applications) in 2016-17 and another 20 in 2017-18. For the quarter ended March 2017-18, the company’s growth is expected to be driven by launches such as two generics of Pulmicort (steroidal inhalation) and Dacogen (chemotherapy side effects treatment). These two were launched in the December 2017 quarter, and benefits will reflect in the fourth quarter. In the UK, too, the launch of a combination inhaler will be keenly watched, given the huge market size, estimated at $450 million.

Ranvir Singh at Systematix Shares says among large-cap companies, Cipla is in the sweetest spot. The three observations on the Pithampura plant are not serious, he says, and Cipla’s business will not be disturbed.

Most analysts say the growth and earnings visibility for Cipla is high, which is in contrast to the trouble faced by many of its larger peers.

Last month, Morgan Stanley had maintained its bullish stance on Cipla, in view of the high-teen earnings growth visibility, driven by sales in the US and elsewhere, and cost-control measures.

At current levels of ~600, the stock is valued at 22-23 times its estimated 2017-18 earnings, which looks fair in the light of growth expectations.