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Tamiflu gives a temporary boost to Cipla stock

Tamiflu gives a temporary boost to Cipla stock
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First Published: Mon, Aug 10 2009. 10 49 PM IST

Updated: Mon, Aug 10 2009. 10 49 PM IST
Shares of Cipla Ltd rose by as much as 8% intraday on Monday as some investors were excited about the fact that it is one of the few companies in the world that manufactures the generic Tamiflu drug, which is used to treat swine flu.
But much of the gains evaporated by the end of the day’s trading session, with the stock ending just 2.5% higher. As one analyst puts it, “It’s not that Cipla is a small company which will benefit from one big order. Cipla is expected to report a net profit of about Rs1,000 crore this financial year, and the Tamiflu opportunity can increase this only at the margin.” In any case, Cipla shares are quite expensive and a number of analysts feel they need to correct.
According to Bloomberg news agency consensus estimates, the stock trades at over 18 times expected earnings for fiscal year 2010-11, making it the most expensive pharma stock on the Street. In comparison, Sun Pharmaceuticals Ltd, which has traditionally enjoyed relatively high valuations, trades at about 15 times expected earnings for the year to March 2011.
As far the Cipla’s financial performance goes, things have been looking bright lately. Buoyed by the sharp depreciation in the rupee, the firm reported an increase of 37% in profit after tax, adjusted for exceptional items, on a year-on-year (y-o-y) basis. Revenue growth was subdued at around 11% in the domestic market and lower than some of its peers, but exports grew at a faster pace. Margins improved sharply, thanks to the rupee depreciation, lower material costs and a better product mix.
From the September quarter, the y-o-y gains on the rupee will diminish considerably since the currency had depreciated significantly towards the end of 2008. In fact, if the rupee appreciates from the current levels, it could work against the firm as well.
Besides, a recent Citigroup Research report points out: “Cipla’s business model lacks significant value-addition, both in terms of innovative research as well as control over the front-end in the US and European generics markets.”
Of course, there could be positive news developments that support the stock, but since valuations are already stretched, the downside risk seems higher.
Write to us at marktomarket@livemint.com
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First Published: Mon, Aug 10 2009. 10 49 PM IST