Five reasons why it may just be the right time to buy Cipla now?

ET INTELLIGENCE GROUP: Cipla posted a subdued show for the quarter March with certain one-off items severely impacting the profitability. The company has proved to be a disappointment among the frontline pharma stocks and may remain so in the near term. However, for investors looking at value buys of quality stocks from a longer term perspective – Cipla may just be the right pick at this juncture. Here are the five reasons why one could consider accumulating the stock:

1. Core Business Strengths:

Management bandwidth and execution has proved to be the sore point in case of Cipla – with investors waiting for the past three to four years for the company to transition its business model. Despite being a late mover in the US generics market, Cipla has a sound strategy and robust manufacturing infrastructure. It has a strong position – being the third largest player - in the domestic and South African generic markets. US business currently contributes 20% of the total revenues. As the proportion of this high margin business grows, it will help improving the company’s profitability.

2. Prioritising of Markets and Resources:

Cipla is restructuring its emerging market resources – exiting from the smaller fringe markets that don’t materially add to the revenue but increase complexity in operations. The strategy is to proactively simplify the business and ensuring focus only on 15-20 high growth markets where the company has a leadership position.

3. Increased R&D Spend:

From 6 to 6.5% of net sales, Cipla has increased its R&D spend to 8-8.5% of its net sales. A large portion of this spend would be on differentiated generics and specialty products for the US market.

4. Product Pipeline:

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.The company currently has 78 ANDAs pending for approval in the US. Launch of its generic inhaler Advair in the UK, though delayed, remains a latent growth opportunity.

5. Attractive Valuations:

Having depreciated 30% in the past one year and trading at a price to earnings multiple of 22.5, Cipla’s stock has limited room for a major downside. Its peers Sun Pharma, Lupin and Dr Reddy's Labs – with large established businesses in the US are trading at much higher price to earnings multiples of 48, 29 and 26 respectively. Management has conservatively guided for a base business revenue growth in the mid-teens over the medium term with an EBITDA growth of ~15-20%.