Gaining on healthy demand

The situation
Cipla suffered a number of changes in the last couple of years. First, Amar Lulla, joint MD, put in his papers in 2011 on health grounds. Then the CMD, Y K Hamied, stepped down in 2013. These were followed by a spate of top-level exits, including the CFO. A change in strategy saw the company buying up its distributors in export markets. Low offtake by the South African government led to sluggish revenue growth in FY15.

What's changed?
After its two-year investment phase ended in FY15, Cipla has now entered into a high growth phase as it ramps up market share in the EU and the US, with improvement in demand in South Africa and resolving of supply-related issues in the domestic market.

Triggers

• Cipla's inhaler has a market share of 10-15 per cent in Germany and Sweden. It is likely to get UK approval this financial year. It has set a target of 50 per cent share in the UK. The UK constitutes half of the $800 million EU market for the drug.
• Following low demand in tender sales (government orders) in South Africa last year, recent tender wins and increased government offtake promise better growth this financial year. This business brings in 14 per cent of Cipla's revenues.
• Cipla sells Nexium at 30 per cent profit sharing with Teva in the US. In the March 2015 quarter, Teva reported $300 million plus sales for Nexium. That should drive Cipla's bottom line.
• Cipla made 12 filings in FY15. These specialised in respiratory, oncology and anti-infectives. These coupled with Cipla's limited competition products are to drive revenues in the medium term.
• Supply-related issues impacted domestic sales in FY15. In spite of these issues, Cipla reported an 18 per cent growth (YoY) in domestic sales. Those issues are likely to get resolved in the current year.

What lies ahead?
Cipla's UK push will add to the bottom line as will greater Nexium sales in the US. Improved government buying in South Africa promises further gains.

Valuations
Cipla trades at 45 times earnings. With earnings set to go up, valuations are likely to cool down. Buy.