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Cipla an underperformer: HDFC Sec

Monday, July 23, 2007

The outlook is subdued due to the following reasons.

Continuous pricing pressure in the US generic formulation business could hit the company’s profitability going forward. The steep appreciation in rupee will take a toll on Cipla’s profits this year.

Earlier, the profitability was higher because of the exclusivity in sales to partners in the US market.

Global consolidation in pharmaceuticals business can have a negative impact on Cipla. For instance, if Teva acquires IVAX, it could cause loss of business from IVAX going forward, which is one of the major clients of Cipla.

Cipla is not moving up the value chain in regulated markets, which keeps it on the verge of substantial risk going forward.

At the current price of Rs. 201, the company is trading at a forward PE ratio of 28.3x and 21.6x based on FY08 and FY09 EPS respectively. We reinforce our Under-performer rating on CIPLA Ltd.

Results snapshot

Company’s Q1FY08 results are way below our expectations. Net sales for the quarter increased marginally by 4.9% YoY to Rs. 9018.3mn.

Domestic sales grew 6.9% to Rs. 5053.5mn. Formulation export remained flat at Rs. 3203.4mn. Rupee appreciation impacted the formulation export negatively.

Net profit for the quarter came down drastically to Rs. 1197.6mn, a dip of 29.7%.

Operating profit for the quarter went down 28.5% to Rs. 1792.3mn. Operating margins for the quarter fell 930bps to 19.9%. The major reasons for such drastic decline in margins were increasing pricing pressure in US generic market, unfavorable sales mix and increase in raw material cost.


Unfavorable outcome of litigation pending against overpricing of drugs could cause liability of Rs 7.5 billion.

Risk of losing alliance with existing clients due to acquisition or merger of the clients with other companies.


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