Even after poor results, Cipla stock may just be the right pick now

ET INTELLIGENCE GROUP: The Cipla stock hit a 52-week low on Wednesday after the company reported an exceptionally poor show for the quarter ended March — partly impacted by one-off items. The company has turned out to be a disappointment among frontline pharma stocks and may remain so in the near term. But, for investors looking at value buys of quality assets with a longer-term perspective, Cipla may just be the right pick now.

Despite being a late mover in the US generics market, Cipla has a sound strategy and robust manufacturing infrastructure. However, execution has been its sore point — investors have been waiting for the past couple of years for the company to transform its business model. It has a strong position, being the third-largest player in the domestic and South African generic markets. The US business is 20% of total revenues. As the proportion of this high-margin business grows, it will help Cipla improve profitability.

Cipla is restructuring its emerging market resources, exiting from the smaller fringe markets that don’t materially add to revenue but only increase complexity in operations. The strategy is to proactively simplify the business and focus on high-growth markets where the company has a leadership position.

From 6-6.5% of net sales, Cipla has increased its R&D spend to 8-8.5%. A large portion of this spend would be on differentiated generics and specialty products for the US market. Aided by its recent buyouts — Invagen and Exelan — Cipla is expecting to file 20-25 products and launch 10-15 products in the US this fiscal (with some of them likely to be limited competition opportunities — products with only a few rivals in the market.)

Having fallen 30% in the past year and trading at a price to earnings multiple of 22.5, the stock has limited room for a major downside. Its peers such as Sun Pharma, Lupin and DRL, with large established businesses in the US, are trading at a much higher price-to-earnings multiples of 48, 29 and 26, respectively. Data from Bloomberg show nearly 50% of analysts tracking Cipla’s stock are still bullish on the company.