Speculations are ripe in the market about drug maker Cipla's promoters being in talks with major private equity (PE) players to pare a part of their total stake in the company.
Moneycontrol reported, quoting three independent sources, that PE firms Blackstone and Baring Asia, among others, are in talks to explore a deal. While there is no confirmation from either side, rumours are agog in the market.
The paring of some promoter stakes, which is seen as part of the company's succession plans, has also triggered a spark of bullishness among analysts and investors alike.
Aside from the drug maker's already strong growth prospects, analysts believe that an entry of a PE investor has the potential to take the company to even greater heights.
A private equity player generally invests in a company and helps turn things around for them to eventually exit with large profits on their initial investments.
Also Read: Cipla promoters said to explore stake sale to Blackstone, Baring Asia
As for Cipla, Kotak Institutional Equities has pegged a fair value of Rs 1,230 for the stock, but analysts expect the number to rise significantly in the coming years, backed by the strong prospects of the drug maker.
As per Bloomberg data, consensus FY24/FY25 EPS estimates for the stock sit at 45.07/51.88.
Over the past five years, Cipla has seen sales compound at 8 percent but it has been able to show brisk growth in profits at the rate of 16 percent annualised. Its return ratios have also improved over the past two years. In FY23, it posed a ROCE (Return on Capital Employed) of 18 percent.
How will Cipla benefit?
An analyst, who spoke on condition of anonymity, explained that the entry of a PE investor doesn't just bring financial capital but also intellectual expertise and a strong management pedigree, which holds the potential to turn things around.
In Cipla's case, the already strong base set by the company's resilient business provides even greater scope for magnified growth in the long term.
The changing dynamics within the global pharmaceutical space also present a greater expanse for growth for one of India's leading drug makers. The analyst mentioned earlier also highlighted the upcoming slew of patent expiries lined up from FY25, which opens the doors for Cipla to enter into newer territories and maximise its potential, which can also be taken to new heights with a PE player on board.
Also Read: Cipla zooms 9% on stronger-than-expected Q1; brokerages cheer, raise targets
"Several patents for small and large molecules, along with biosimilars, are also set to go off patent from FY25, which gives Cipla a greater room to explore more opportunities," the analyst said. With the expiry of patents, Cipla may also look to expand its presence in the biosimilar segment from around FY28.
The other molecules in Cipla's pipeline include 4-5 peptides, slated for a launch within the next two years. These molecules are very complex to manufacture but provide great revenue opportunities, adding another star to Cipla's ratings.
As for Cipla's current standing, the future only looks brighter. The drug maker is going big on complex drugs, with a pipeline consisting of big-ticket blockbuster drugs like the generics of Advair and Abraxane, which will incrementally fuel Cipla's financials.
To top it all, another analyst highlighted Cipla's industry-leading growth and presence in the Indian pharma market that remains unmatched as compared to its peers. Moreover, there are expectations, both among the company's management and analysts, that this industry-leading growth for Cipla is most likely to continue in the coming time.
With the growth engines well-oiled by Cipla, analysts say they will not be surprised to see the company firing from all cylinders with the arrival of a PE player.
Reasons are aplenty for the market to anticipate magic happening at the hands of PE players, if they were to gain some control over Cipla, especially after the success stories of KKR’s bet on JB Chemicals, Quadria Capital's turnaround of Concord Biotech and Capital Group's take on Mankind Pharma.
Also Read: Cipla raises margin guidance for FY24 to 23% on strong Q1
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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