Cipla lines up large capital expenditure to fund expansion2 min read . Updated: 23 Sep 2009, 10:42 PM IST
Cipla lines up large capital expenditure to fund expansion
The Rs4,960 crore pharmaceutical firm Cipla Ltd is adding capacity to grow in the domestic and international markets. The company is raising money to fund this expansion through an issue to qualified institutional investors, which opened on Tuesday.
Reports say it has raised about $140 million, or Rs672 crore. Apart from meeting its growing business needs, the expansion plans are also aimed at taking advantage of tax benefits.
India, where Cipla has a 5.4% share in the retail market, contributes to about 40% of its revenues. Exports are a key growth driver. They contributed about 60% of revenues and growth was 33% in the year ended 31 March, compared with 17% for the domestic market.
The company’s business model is unique compared with other large pharmaceutical companies. Instead of entering into big markets by itself, setting up a marketing and distribution infrastructure and doing all the regulatory filings, it ties up with local companies.
It is a low-risk model, with Cipla’s upfront costs being limited, and the market risk is borne by the other partner. But the returns are lower, too. Its business model requires it to continuously expand its product offerings to target higher volumes for growth. In 2008-09, its production grew rapidly even as it expanded capacity.
Developed markets are a smaller market for Cipla, with revenues of Rs767 crore in the 12 months ended March. Emerging markets are the main focus, with Rs1,976 crore of revenues. It believes there is potential to ramp up growth, especially in Africa, for anti-retroviral and anti-malarial drugs, and in South America.
The Indian market contributed 41.6% of the company’s revenues. It expects the rural market to be a growth area.
Cipla’s capital expenditure programme is to expand and upgrade its existing plants to meet international standards. The US Food and Drug Administration has been coming down heavily on companies, forcing them to be fully compliant.
The firm has invested Rs1,900 crore between fiscal 2007 and 2009, and has projected annual capital expenditure of Rs500 crore for the year to March and the next fiscal year. Cipla’s working capital needs will also rise and are estimated to increase by Rs300 crore a year.
As new plants come on stream, Cipla will be in a position to drive growth in its key export markets. Till then, its performance will depend on its existing business. The equity dilution will have some effect on earnings in the interim, though this may be factored in its price already.
The stock has underperformed the BSE Healthcare Index on the Bombay Stock Exchange over the past few months, but it should continue to give moderate returns, thanks to its low risk. The scrip was down 1.6% on Tuesday at Rs260.
Write to us at email@example.com