Cipla rides high on Nexium but strikes a cautious note2 min read . Updated: 17 Aug 2015, 12:49 AM IST
Investors would do well not to ignore Cipla's cautious stance, or its desire to reinvest these profits in its business
Cipla Ltd’s earnings were expected to be good but not this good. Its performance was expected to get a boost from the supply of generic Nexium, a drug to treat acid reflux, to Teva Pharmaceutical Industries Ltd for the US market. This quarter saw a large part of Cipla’s exclusivity-related share of Teva’s profits reflect in its numbers. That’s why Cipla’s sales rose 42.3% to ₹ 3,777 crore and its operating profit rose 91.8% to ₹ 1,039 crore.
But Cipla has maintained its earlier guidance of 20% sales growth for FY16, despite the high growth in the first quarter. Its caution stems from the expectations of a lower contribution from generic Nexium as generic competition steps up. The number of competitors and their aggression will determine the extent to which revenues decline.
Based on its guidance, Cipla is pencilling in only a 12.7% increase in overall sales in the remaining nine months of FY16. That does seem rather cautious, but Cipla is open to revising its guidance if the US sales growth turns out to be better than expected.
What’s happening in the rest of Cipla’s business? In India, sales grew 8.4%, which is relatively low when compared with what the other firms achieved. This has been attributed to a few factors: slowdown in its generic drugs business, rationalization of products and seasonal variations. Growth in the full year is expected to normalize. In other markets such as Europe and South Africa, too, organic growth was good, said the company. It faced bottlenecks in manufacturing earlier in FY15 and these have been resolved, contributing to better sales.
Cipla has also announced that it plans to make investments, which would result in higher operating expenditure, bringing forth some research project milestones from FY17 to FY16, apart from investments in the consumer products and biologics business. It appears it wants to put the windfall from the Nexium contract to good use.
Cipla’s net profit rose 120%, which should reflect in its share movement on Monday. But investors would do well not to ignore Cipla’s cautious stance, or its desire to reinvest these profits in its business. While sales growth could be higher, these investments can affect margins in subsequent quarters. After all, while Cipla’s first quarter operating profit margin rose by 7 percentage points, it is still sticking to its guidance of a full-year increase of 100-150 basis points. One basis point is one-hundredth of a percentage point.