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Nath Balakrishnan

Mr Yusuf Hamied, CMD of Cipla... Competition from other players in the domestic market has kept profitability levels on a leash.

SHAREHOLDERS in Cipla can continue to retain their holdings. But no fresh exposure need be considered at this juncture. The stock trades at a price of Rs 631, which is 15.2 times its earnings per share for year-ended March 2003.

VAT issues: The numbers for the last quarter of the fiscal were impacted largely by the uncertainty surrounding the implementation of the value-added tax (VAT) regime, which was supposed to take effect from April 1. Though the date for implementation has since been deferred, several issues still need to be resolved.

The only silver lining could be the decision to impose VAT at four per cent on medicines.

In the following quarter too, numbers are likely to be subdued because of the truckers strike for the best part of April. Members of trade may also resort to selective destocking till such time greater clarity emerges on the VAT front.

These factors may impinge on the company's domestic performance. But it is the export performance that plays a pivotal role in determining Cipla's profitability.

Typically, exports to regulated markets such as the US and the UK provide for higher realisations compared to the domestic market.

Cipla has a presence in the anti-infectives, anti-bacterial, anti-cancer, anti-asthma and anti-HIV categories.

However, competition from a clutch of players in the domestic market has kept profitability levels on a leash.

For instance, Cipla's exports rose a whopping 92 per cent for the year ended March 2002. On the back of such a stellar export performance, net profits also rose by over 30 per cent. Cut to this fiscal. Exports grew at a more modest rate as a result of which net profit for the year ended March 2003 rose 5.2 per cent at Rs 247.4 crore.

Supply of Omeprazole to Andrx Corporation of the US was supposed to be the key export driver for the year ending March 2003. Andrx Corporation had challenged the patent held by Astra Zeneca on Prilosec (an anti-ulcerant) with the intention of launching a generic version of the drug.

Cipla was one of the suppliers identified to provide the bulk drug for the formulation. However, Andrx lost the case last October as a result of which exports of the high-revenue yielding Omeprazole took a hit.

CFC-free inhalers: The other area that holds out promise is the export of CFC-free asthma inhalers to Germany and subsequently to elsewhere in Europe. This carries huge potential in the environmentally sensitive European market as CFC's (chlorofluorocarbons) are ozone-depleters .

The export of these inhalers was to have begun in the just-concluded financial year but do not appear to have taken off as expected. An Italian company that received permission to sell similar inhalers in the German market appears to have pre-empted Cipla's market entry.

Still, considering the size of the market, there could be an upside attached to Cipla commencing export of these inhalers to Germany.

A clear roadmap regarding when these exports would commence is not available. Should it take place during this financial year, it would act as a trigger to the stock price. Outlook: Cipla's competitiveness, its strong process engineering skills and its visibility in the domestic market can certainly not be overlooked.

The stock did take a hammering immediately after declaration of the earnings, as it was perceived to be below market expectations.

At current levels, the scope for downside appears limited. Shareholders can stay invested and fresh additions can be contemplated after there is clarity on the export prospects.

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