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Cipla’s margin focus likely to yield benefits in the long term

Cipla’s margin focus likely to yield benefits in the long term
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First Published: Sun, Sep 11 2011. 11 36 PM IST

Updated: Sun, Sep 11 2011. 11 36 PM IST
Cipla Ltd has seen the world around it change in a short span of time. Chairman and managing director Y. K. Hamied’s recent speech at the annual meeting of shareholders talked about a major change in the structure and thinking of the global pharmaceutical industry in 2010-11, including in India.
The triggers for this change are fewer blockbuster products in the global research pipeline, patent expiry of blockbuster products and a sluggish developed world economy.
The results of these are more worrying for companies in emerging markets, such as Cipla, and also their promoters. Multinational firms (MNCs) are mimicking the strategy of generic players; launching generic products, hiring field-force aggressively and expanding distribution, even into rural areas.
This aggression, backed by the financial muscle of these companies, has convinced some promoters to throw in the towel. Nicholas Piramal India Ltd was a recent example, while Ranbaxy Laboratories Ltd is a much older one.
The promoters have moved on to other areas they considered more promising. And, it is not a question of whether more promoters will sell, but, when. Cipla’s name, too, figures in market talk about sell-outs, but promoters dismiss it.
In his speech, Hamied alluded to strategic alliances and partnerships in the industry, with companies putting aside minor differences to join hands. This is a reference to the tussles between Indian and foreign companies in the generic drug space.
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Cipla appears more interested in marketing alliances without a stake sale. But big MNCs are increasingly interested either in large and exclusive alliances or in acquiring controlling stakes.
The timing may also be wrong for Cipla’s promoters to consider a stake sale.
Its share has been an under-performer, compared with the healthcare index on the BSE in 2011 so far, falling by 23% compared with an 11% decline in the industry index.
The company’s financial performance has been under the weather, chiefly due to the start-up costs of a large export-oriented factory, and lower sales growth. India’s attraction for pharmaceutical MNCs is another headache as competition in the domestic market mounts, especially in the anti-infective segment.
In fiscal 2011, Cipla got around 55% of its income from international markets and the rest from India, making it dependent on both for growth. The company has changed its product mix to higher margin products.
That has affected its sales growth; and even in fiscal 2012, it is forecasting sales to grow by around 10%.
But it expects margins to improve. There is already a noticeable improvement in its profitability in the June quarter, compared with the March quarter. During 2011-2012 and beyond, as the new facility ramps up, and the base effect of a change in its product mix diminishes, sales growth and profitability should stabilize. That will allow its earnings per share to reach more healthy levels.
One risk is if price pressures intensify in the domestic market. If not, better earnings growth should lead to its share price stabilizing. But this is expected to happen over a longer period.
Analysts are forecasting only a 12% growth in earnings in 2011-12, followed by a 21% growth in the next year, according to consensus estimates polled by Reuters. Thus, a more near-term trigger will be a significant marketing alliance with an MNC, or a stake sale.
Graphic by Yogesh Kumar/Mint
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First Published: Sun, Sep 11 2011. 11 36 PM IST