Why you should continue holding Cipla stock

The stock of pharmaceutical major, Cipla has gained 28 per cent since the YTD low of mid-March 2021. USFDA approval for the company’s generic Sumatriptan nasal spray in early March seems to have spurred the stock movement. Positive developments around the company’s collaboration with foreign pharma companies for marketing, distribution and/or manufacturing of Covid-related drugs too have likely aided the rise.

At the current market price of ₹967.75, the stock discounts its one-year forward estimated earnings (Bloomberg consensus) by 27 times. This is higher than its three-year historical average forward price-to-earnings (P/E) ratio of 24 times but in line with peer valuations. Sun Pharma and Dr. Reddy’s Lab are trading at one-year forward P/E multiples of 26 and 28 times respectively.

Cipla is ranked number two in chronic therapies in India with an overall market share of 8.1 per cent. It’s leading position in the therapeutic areas of respiratory and urology, should hold it in good stead. Additionally, Cipla’s focus on consumerisation - transferring select consumer brands (six so far) from the trade generics portfolio to its consumer health subsidiary - for better pricing and customer stickiness, and cost optimisation efforts should help the India business. A few significant respiratory product launches including those of Advair and Nano-paclitaxel, likely next year are expected to meaningfully drive growth in the US market. Geographically, India contributed around 40 per cent of Cipla’s revenue in FY21. The US and SAGA (comprising South Africa, Sub-Saharan Africa and Cipla Global Access) markets accounted for another 21 per cent and 18 per cent, respectively.

Existing investors in Cipla can therefore, continue to hold the stock with at least a two-year time horizon.

Leadership, cost savings

Cipla is the number one player (one-fourth market share) in respiratory products in India. It is the largest player in urology with a 14.8 per cent market share. It is also present across several other therapeutic segments such as anti-infectives, and cardiology. Revenue from Cipla’s India operations, which today comprise the branded prescription, trade generics and consumer healthcare business, grew at 8.3 per cent (CAGR) between FY16 and FY21 to reach ₹7,736 crore. The fiscal year gone by was marked by significant cost savings in the Indian business driven by digital marketing initiatives post Covid. The impact of this is likely to continue in current financial year, though not to the same extent. A lot depends on how Covid case count progresses. This will impact the Covid portfolio revenue (4 per cent of FY21 total revenue) too.

US product launches

Given its strength in the respiratory space, Cipla has also expanded its presence in the US generics market helped by the launch of limited competition products in recent years. Cipla’s revenue from this market went up to USD 551 million by FY21. The US generics business profitability in FY21 was almost at par with the company-level profitability.

The successful launch and ramp up of generic Albuterol sales bumped up FY21 US sales. Cipla enjoys 13.2 per cent share in the Albuterol market and expects this to grow. The launch of generic Advair is expected to provide a revenue boost.

Strong financials

Between FY18 and FY21, Cipla posted 8 per cent growth in consolidated revenue from operations, 15 per cent in EBITDA and 19.5 per cent in net profit (all CAGR). This was especially helped by the FY21 performance. Cipla reported 11.8 per cent year-on-year growth in consolidated income from operations to ₹19,160 crore, 33 per cent growth in EBITDA to ₹4,303 crore and 56 per cent growth in net profit to ₹2,405 crore in FY21. It involved significant cost efficiencies and a healthy demand for respiratory and chronic therapy products in India. Cipla’s strong balance sheet as reflected in positive net cash of ₹1,921 crore as of March 2021 is another plus.

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