24 November 2009

Cipla Ltd. - Is it Investment-worthy?

The Company, in brief
Cipla is one of the largest Pharma Companies by domestic market
share, with a strong presence in the anti-asthma, anti-infective, anti-
AIDS and cardiovascular segments and a moderate presence in the
anti-inflammatory and anti-ulcerants segments. The company has
grown organically over the years and today is the largest standalone
generics company in the world. The Company engages in the
manufacture, sale, and export of pharmaceutical and personal care
products in India and across the globe (in 180 countries). The major
revenues come from the domestic market followed by Africa, the
Americas and Europe as shown in the pie-chart

Geographical distribution of Revenues in FY2009. The product portfolio of the company is shown below

Product Portfolio

What does the 10 YEAR X-RAY of its

Financials reveal?
The 10 YEAR X-RAY at MoneyWorks4me.com facilitates analysis of
The five most important parameters that
the financial performance of the company considering the five most
one needs to look into are Net Sales
important parameters. A 10 Year period will normally encompass an
Growth Rate, EPS Growth Rate, BVPS
entire business cycle. Analysing the performance over this timeframe is
Growth Rate, ROIC & Debt to Net Profit
essential to understand how a company has fared during good as well
Ratio.
as bad times. The five most important parameters that one needs to
look into are Net Sales Growth Rate, EPS Growth Rate, Book Value
per Share (BVPS) Growth Rate, Return on Invested Capital (ROIC)

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 Cipla Ltd. – Is it Investment-worthy?
10 YEAR X-RAY of Cipla Ltd.
Cipla has become a market leader due to
a diverse product portfolio combined
with cost competitive manufacturing.
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and Debt to Net Profit Ratio.
During the last 10 Years, Cipla has performed well growing at high
growth rates in its Net Sales and BVPS. The EPS growth rate dropped
in 2007 and 2008; however it has increased to 11.34% in 2009. The
BVPS growth rates have been high throughout the 10 year period. The
ROIC figures have also been consistent and always been higher than
12% which indicates that the company has utilized the funds very
efficiently. However in the last 4 years, the decreasing ROIC figures
are cause for a bit of a concern. The Debt to Net Profit ratio as of
March 2009 is very comfortable. In September 2009, the company
raised Rs.671 Crore through QIP which will be utilized for funding
expansion and also retiring debt. This will further improve the Debt to
Net Profit ratio. Hence, Cipla Ltd is a financially strong business worth
looking at for investment at the right price.
What enables it to make money?
Started in 1935, Cipla has now become a market leader in important
segments of the Indian Pharmaceutical sector. This has been possible
due to its diverse product portfolio combined with its cost competitive
manufacturing. The company has developed a good reputation for
quality and affordable medicines which has helped it to establish itself
in the global markets and become the world’s largest standalone
generics company. It has continuously laid emphasis on Research &
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 Cipla Ltd. – Is it Investment-worthy?
Cipla is the only company which
manufactures Oseltamivir & Zanamivir,
used in the treatment of Swine Flu.
Cipla is one of the lowest cost
manufacturers of drugs. This gives it a
distinct competitive advantage.
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Development in an effort to further improve its product portfolio and
make the most of opportunities in the Pharmaceutical Sector.
Product Portfolio
Cipla produces a variety of products, like formulations, bulk drugs, agro-
chemicals, animal health care products, various life-style drugs and
personal care products and flavours & fragrances. Cipla has a wide
range of pharmaceutical products in its portfolio. It has a host of
products which are part of WHO list. These products are eligible for
procurement for all WHO / UN sponsored programs. Cipla's Oseltamivir
75 mg capsule marketed as `Antiflu' has been included in the World
Health Organisation (WHO) list of Pre-qualified Medicinal Products
useful in the treatment of influenza A (H1N1) infection i.e. Swine Flu.
Another product used in the treatment of Swine Flu that the company
produces is Zanamivir. Cipla is the only company in the world that
has both these products. The company is also in the final stages of
exporting of non-CFC (chlorofluorocarbons) metered dose inhalers in
Europe. The overall market for these inhalers is around 1800 Million
Euro. The Company is working on a joint venture with a Chinese
Company to produce biosimilars and is expected to make an
announcement regarding this soon. It has also entered into an
agreement to develop and distribute stem cell related products.
Cost-competitive manufacturing
Cipla is the world’s largest manufacturer of cost effective anti-retroviral
drugs. In Africa, it launched an HIV drug which was three times
cheaper than drugs offered by global companies. The price differential
between Cipla’s pricing of anti-HIV drugs and equivalent drugs being
sold in the USA by the patent holders is in excess of US$ 2 to 3 billion
per year on the volume of drugs supplied. This low cost production
gives Cipla a competitive advantage.
Reputation & Quality
Over the years, Cipla has established an enviable reputation worldwide
as a Company that manufactures safe, quality, effective and affordable
medicines. High quality research and ethical standards followed has
helped Cipla create this reputation. Several dosage forms and Active
Pharmaceutical Ingredients (API’s) manufactured in the Company’s
plants have been approved by most major international regulatory
agencies. These agencies include the US FDA, MHRA (UK), PIC
(Germany), MCC (South Africa), TGA (Australia), Department of Health
(Canada), ANVISA (Brazil), SIDC (Slovak Republic), Ministry of Health
(Kingdom of Saudi Arabia), the Danish Medical Agency and the WHO.
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 Cipla Ltd. – Is it Investment-worthy?
A leading European advisory firm has
th
ranked Cipla 14 among all
Pharmaceutical companies worldwide.
Cipla is the first player outside US and
Europe to launch non-CFC metered dose
inhalers.
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Global Operations
The Company has an impressive global presence and is expected to
continue to lay emphasis on its overseas business. Around 56 per cent
of the overall income from operations comes from outside India. Cipla
exports raw materials, intermediates, prescription drugs, OTC products
and veterinary products. Cipla also offers technology for products and
processes. The Company works closely with all its overseas partners in
over 180 countries to maintain its export growth. As on date, the
Company has registered about 5500 products in various countries.
Recently, a leading European advisory firm ranked Cipla 14th among all
pharmaceutical companies worldwide as a provider of access to
medicines with a corporate social responsibility. Exports for the financial
year ended March 31, 2009 amounted to more than Rs. 27,500 million.
Research and Development
Cipla has extensive research capabilities, ranging from Chemical
Synthesis, Delivery Systems and Medical Devices to Process
Engineering, Animal Health Products, Nutraceuticals and
Biotechnology. Its quality R&D facilities have helped the company in
generating revenues from diverse product segments. It was the first
player outside US and Europe to launch non-CFC (chlorofluorocarbons)
metered dose inhalers. As mentioned the Company is also planning to
enter the biosimilars segment soon.
Growing Generics Market
The generics market is expected to have buoyant growth worldwide
primarily due to blockbuster patent expiries, increasing generic
penetration, increasing burden of healthcare costs in developed
countries and wider access to healthcare in developing economies.
With over US$ 80 bn of drugs to go off patent by 2012 and with higher
penetration across developed and emerging markets expected, the
generics market will continue to provide attractive growth opportunities
in future.
What are the likely roadblocks ahead?
Even though Cipla is one of the top companies in the Pharma sector, it
has its share of problems and roadblocks which can affect its growth
story. Drugs in India are subject to price regulation by the government.
The new Pharma Policy proposed by the Government can affect the
company adversely as many of its products may be brought under price
control regulations. The Patent Act 2005 may affect development of
future products and lead to an increase in the number of litigations filed
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 Cipla Ltd. – Is it Investment-worthy?
Some products produced by Cipla may
come under price control.
The pipeline of new drugs available for
launch will gradually shrink owing to the
new patent regime.
Cipla earns more than 50% of its
earnings from overseas markets and is
thus affected by the exchange rate
volatility.
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against Cipla. With the Government allowing 100% FDI in the Pharma
sector, competition will intensify in the next few years. As the share of
revenues from foreign countries increases, Cipla will be exposed to the
effects of Foreign Exchange volatility on its profitability.
Price Control
The growth of the domestic pharmaceutical industry is very much
dependent on the government’s drug pricing policy. The new Pharma
Policy proposed by the Government threatens to cover most of the
drugs under price control. Government has included products like
Salbutamol, Theophylline, Ciprofloxacin, Cloxacillin, Norfloxacin etc
which are produced by Cipla and has good market coverage, into the
ambit of price control. Litigation with Government is still going on. These
price controls threaten to reduce the profitability of the company and
needs to be watched.
New Patent Regime
The government's decision in 2005 to amend drastically the Patent Act
1970 and backdating product patenting to 1995 has already initiated an
unpleasant series of litigations between pharmaceutical companies.
Introduction of high priced, monopoly drugs has already started in the
country and will gain momentum with the passage of time. The Patent
Act 2005 could have a major adverse impact on future generations not
only in India but throughout the third world and the developing world
that looks at India for supplies of their essential medicines. Patented
and monopoly drugs could become unaffordable. It is expected that the
pipeline of new drugs available for launch will gradually shrink owing to
this new patent regime.
Competition
India, with a strong generic drug industry is fast becoming a battle
ground between domestic drug makers and big Pharma MNCs. Indian
Pharma industry is expected to grow annually at 13%. To reap the
benefit of a rising market, global drug discovery companies are keen to
establish a strong presence in India and protect their patents here.
Exchange Rate Volatility
Cipla has an impressive presence in global pharmaceutical markets. It
earns more than 50% of its earning from overseas markets. Exports
formed 56% of total turnover in FY’09 and are expected to rise in FY’10.
Any fluctuation in exchange rate affects the company earnings
significantly and needs to be watched with caution.
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 Cipla Ltd. – Is it Investment-worthy?
Figure 1 – TTM EPS, latest 4 Quarters
Figure 2 - Net Sales Growth Rate, Quarterly (%
Change Vs Prior Year)
Figure 3 - EPS Growth Rate, Quarterly (%
Change Vs Prior Year)
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Rising Costs and Availability of Materials
The prices of many API’s and input materials have risen significantly
due to restriction in production by Chinese chemical manufacturers, rise
in price of petroleum-based products, frequent shortages and general
inflationary conditions. The Company is looking at alternative
arrangements and has also increased its stock levels. However, the
increased prices and shortages of materials will adversely affect
production schedules and overall margins on all the Company’s
products.
What is our Short Term Outlook?
If we see the trend of TTM EPS (fig 1.) over the last 4 quarters, we see
that it has been increasing steadily. The last four quarters have been
good for the company and it has been performing well. This augurs well
for its short term future prospects.
The quarterly growth rates graph (fig. 2) shows that the growth rates of
net sales have fallen in the first two quarters of the current financial
year, as compared to those of corresponding quarters of last year.
However the EPS growth rate (fig.3) has increased considerably in both
the quarters. This was the result of lower operating costs owing to
a better product mix. This ensured higher margins contributing to
the profitability.
The World Health Organization (WHO) has declared Swine Flu a
'pandemic'. Swine Flu has thus become the first global pandemic in 41
years. The Company’s drug Oseltamivir marketed as ‘Antiflu’ is the only
branded generic drug of its kind available anywhere and qualified by the
WHO for treatment of H1N1 (Swine Flu). This could lead to
governments across the world buying the drug from Cipla.
A point of concern for the company is the negative cash flows that it has
been generating for the past two years. However this has been mainly
due to the expansion projects taken by the company the last few years.
What is our Long Term Outlook?
A highly competent team of scientists and workforce and high quality
R&D activities are expected to give Cipla an edge over other domestic
Pharma players. Recent quality checks by US FDA and its ban on
imports of some drugs is a matter of concern for the entire Indian
Pharma industry. However Cipla has got the FDA’s nod after
addressing all the deficiencies pointed out by the FDA in August 2009.
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 Cipla Ltd. – Is it Investment-worthy?
Global Pharma Industry is likely to grow
at a CAGR of 5% to US$ 1 trillion by
2013.
Cipla has featured in ‘Outlook Profit 100’
as one of India’s 100 most financially
stable companies.
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The Company has been in an expansion mode incurring total capital
expenditure of nearly Rs. 2000 Crore in the last 3 years. This includes
a new Pharma project in Sikkim, a formulation unit in a SEZ in Indore,
a new API facility in Bangalore, expansion of existing API production
facilities at Kurkumbh and Patalganga and expansion of R&D Facilities
at Vikhroli and Patalganga. The company has successfully defended
many litigations with global Pharma giants but in the future such
litigations could increase. Global Pharma Industry is likely to grow at a
CAGR of 5% to US$1trillion by 2013. Indian Pharma market, currently
stands at US$16bn, is likely to be a US$50bn market by 2015. Cipla
with its strengths is well equipped to make the most of the
opportunities that exist and hence the long term outlook for Cipla
looks very bright.
Concluding, we can say Cipla Ltd is a company that is
worth investing in due to its growing business, the
competitive advantage of its strong product portfolio and
low cost manufacturing, its financial performance & its
future prospects. It is a solid company to buy into at the
right time & the right price. You can find out Sensible Buy
and Sell Prices for the company based on Value Investing
principles using the ‘PRICE CALCULATOR’ at
MoneyWorks4me.com.
Cipla Ltd has also featured in ‘Outlook Profit 100’. ‘Outlook
Profit 100’ is a list of ’100 India’s most financially stable
companies’ brought out by Outlook Profit, in its November
13, 2009 issue, applying criteria that is closely aligned to
that of MoneyWorks4me.com.
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 Cipla Ltd. – Is it Investment-worthy?

Source:

Capital Line - The short term graphs have been made using the quarterly results of the company
from Capital Line.
Company Website
Company Annual Reports

Equity Analyst: Nikhil Kale

nikhil.kale@moneyworks4me.com

MoneyWorks4me.com
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Pune – 411 045, India. Tel: 91-20-27293990, 91-20-67210400
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