Cipla Ltd’s shares have gained 7% since it announced disappointing December quarter (Q3)results last week. What gives? The stock gained thanks to the firm’s guidance of a strengthening in the US business and a rebound in Indian revenue.
Last quarter, the drag from the India business and other non-US markets resulted in a mere 2% growth in revenue and a 12% drop in operating profit. Revenue in India, which contributes 40% of Cipla’s revenue, dropped 1%. Business in South Africa and sub-Saharan Africa, which generates a fifth of the revenue, decelerated (down 11%). The company had to take price cuts to clear inventories in certain markets. This impacted profitability.
A 31% growth in the North American business came as a pleasant surprise and helped offset some of this. Cipla expects the positive momentum to continue in the US, helped by ramp-up of new products. The management maintained its guidance of one limited-competition product launch per quarter in the US. Coupled with commentary of a rebound in the India business, the shares have traded higher.
The company’s shares now seem priced for perfection. “Cipla is now trading at a 19 times FY21 price-earnings ratio, leaving no room for error. Execution for the company has been mixed. While US sales have seen pickup, it has been below expectation and failed to drive margin improvement," analysts at Jefferies India Pvt. Ltd said in a note. “We expect the US ramp-up to be gradual and margin improvement to be below expectations."
Further, the business in Africa is expected to continue to face pricing pressures. Price erosion in the tender business is weighing on realizations. As such, growth at the company level may as well be unexciting in the near term.
Revenue so far in FY19 is up just 4%. Operating profit and net profit are down 3-6%. As an analyst with a domestic broking firm points out, the performance leaves much to be desired, especially in the backdrop of premium valuations. The US business may be gaining momentum. But as the analyst cited above says, what it lacks is a major drug launch that can drive disproportionate growth in the near term.
Further, given the cost pressures and concerns about profitability, most analysts see limited scope for earnings acceleration at Cipla.