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Cipla: Sensex berth may trigger buying action

23 Mar 10 02:46 PM
Cipla — one of the oldest generic local pharma companies — became part of a select group of stocks which constituted the benchmark Sensex in January 2001 replacing Novartis.

However, Tata Power replaced it in July 2008. Now, after a hiatus of nine months, the drugmaker is again part of the Sensex, this time replacing Sun Pharma, the country’s most-valuable pharma stock on bourses.

Starting May, Cipla will be the only stock representing the pharma sector in the 30-stock broad index carrying an approximate weightage of 2.10%. And this spot appears to be a deserving one for the company that has consistently maintained its numero uno position in the domestic drug market. It is also a leading generic player and supplier of active pharmaceutical ingredient (APIs) to the US and other important markets globally — earning close to 50% of its revenues from exports. While the company’s total revenues have grown at a slower rate YoY since the past four trailing quarters, it has managed to protect and improve its operating profit margin.

The company has a free-float shareholding of 62%, with foreign portfolio investors, or FIIs, holding 17.4%, insurance companies 11.5% and mutual funds owning 4.8%. It is a consistent dividend payer — although it offers a low-dividend yield of 0.58. Despite its precarious cash position and aggressive capex, Cipla has been generous in distributing dividends to its shareholders. At an average payout of 22.6%, the company has disbursed dividends adding up to nearly Rs 484 crore in three fiscal years ended FY09.

Despite a lot of positive action seen in other leading pharma stocks such as Dr Reddy’s Labs and Ranbaxy, the Cipla stock has performed like a classic defensive stock — underperforming the Sensex and ET Pharma Index over the past one year. Yet, the company commands premium valuations — trading at a market cap of Rs 27,000 crore that is more than five times its annual revenues. A typical pharma company is valued at twice its revenues. The Cipla stock is trading at a price-to-earnings multiple of 25 — fair valuations, given the performance and track record of the company.

While the company’s stock did not see any positive move because of news about the company’s inclusion in the Sensex, it may see some buying action due to the impending replacement. This is because the stock’s inclusion into the Sensex will now call for portfolio realignment in index-based funds that will have to replace Sun Pharma with Cipla in their portfolios.