Arvind Bothra of Religare Capital Markets has downgraded Cipla and also cut the target price to Rs 400 on the back of continued cost overruns. He also listed a few other reasons behind the move.
He expects the company’s margins to be 20-21 percent for full year. But adds if scale up in R&D continues at this pace and approvals from the US do not come through, margins could dip further.
Mumbai-based healthcare firm Cipla 's third quarter (October-December) standalone net profit fell 23 percent year-on-year to Rs 260.8 crore on higher expenses and weak operational performance.
Below is the verbatim transcript of Arvind Bothra's interview with Ekta Batra & Nigel D'Souza on CNBC-TV18.
Ekta: Can you just tell us what is your key concern on Cipla going forward? Is it the margins?
A: The key concern on Cipla from my side has always been continued cost overruns and we believe much of the benefits for the same to be back-ended. What I am referring to is the intensity in R&D spend and content related costs in the print markets. I think the benefits would not be commensurate in the near to medium-term, so you would see further shrinkage of margins from hereon. My downgrade is purely related to the earnings cut wherein my earnings are at least 8-10 percent below consensus still. I see further earnings downgrade to the Q2 follow as company continues to expand its reach in international market and make bolt-on acquisition. On the top-line front I believe the mix on the margin has deteriorated as Africa now becomes a large part of the business. ARV tender sales could play volatility in the profitability as well. So that has been the key cause. For 12-13 percent earning growth trajectory the current valuations are rich.
Nigel: R&D expenditure has been quite high. When will this R&D expenditure give some kind of results?
A: Typical R&D investment for developed markets take anywhere between 3-5 years to have some fructification and Cipla hitherto had been in a partnership model wherein most of the R&D related costs where borne by the partner. Now it has to build its own pipeline. Even if it would have started a couple of years back it would take another 2-3 years for it to reflect. Of course in the meanwhile it would have its partner's products which it has gotten back close to 30 around, but I believe most of these products would be me-too kind and would have a fair amount of competition already. So the incremental R&D efforts is likely to payoff only after FY17 and onwards.
Ekta: Where do you expect Cipla's margins to go to?
A: My assumptions are for a full year anywhere between 20 and 21 percent. Of course this quarter's margins were operationally low, but that could also be due to the impact of higher ARV sales in Africa, but on a normalised basis 20-21 percent is where I expect margins to be at. Like I said, if the scale up in R&D continues at this space and approvals in US do not come through the margins could dip further.
Nigel: What about Cipla's inhaler business? That is a critical part of it. How you are viewing that one?
A: Inhaler business in India and emerging market continue to do well as it has been a strong theme, but my view on developed market expansion in inhaler business is likely to be lower than what the street expects. I think that the benefits of the same should be material only from 2016 calendar year and beyond and till then you would have few approvals, but I do not think that could change the story in a dramatic fashion.
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