On a day when major pharma stocks ended in the red, Cipla made gains of 1.8% to Rs 662 on the back of strong revenue growth in the March quarter. Despite the strong revenue performance, analysts continue to maintain a cautious stance on the stock given the conservative growth guidance by the management. The company has guided for 100-150 bps improvement in margins and sales growth in mid-teens, which analysts say are on the lower side.
The company's growth in the domestic market which contributes 36% to sales remains strong and at 20.7% has outperformed the domestic sector growth of about 12%. The respiratory, cardiovascular, gastrointestinal and anti-infective portfolio continues to do well and momentum is expected to continue moving forward too.
The company's exports also saw good traction growing 25% with the company's strategy of having its own front-end operations yielding results. However the same has a bearing on the margins given higher fixed costs. Nevertheless in this backdrop and also the fact that there were no one-off benefits seen in the year-ago quarter (supply of Dymista nasal spray), margin improvement by about 30 bps to 16.4 percent is positive.
What's in store going ahead are benefits from supply of gastric drug Nexium to Teva both on revenues and margins fronts, starting in the current (June) quarter. With other contenders for generic launch of Nexium such as Lupin and Dr Reddy's unlikely to get approvals or launch before the second half of FY16, Cipla is likely to reap the benefits for at least one quarter.
Nevertheless analysts still see the benefits on margins to be partly offset by increased costs. Analysts at HSBC believe that Cipla remains conservative as they forecast higher sales growth and build in continued higher expenses, although staff costs are expected to moderate. On the margin front, the analysts indicate 200 basis points margin improvement in FY16 including the milestone income from Salix Pharma on anti-biotic rifaximin.
The respiratory opportunities especially for the US will depend on approvals and may not come soon though some analysts expect faster approvals. However Europe is unfolding well and approval of generic Seretide inhaler in the UK is a big catalyst in the near-medium term feel analysts. Surajit Pal at Prabhudas Lilladher expects better traction in respiratory sales in Germany along with new approvals in UK and US in FY16. While Pal has a target price of Rs 781, however others such as Barclays Research are more circumspect due to near-term margin concerns and peg target price at Rs 655. Most analysts hold this view as the consensus target price according to Bloomberg stands at Rs 665.
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