After underperforming its large-cap peers, including Sun Pharma, Lupin and Dr Reddy’s, over the last five years, the Cipla stock gained about 12 per cent last week.

The drugmaker’s investments over the last few years are expected to pay off in the next 3-5 years. At the current price of ₹500, the stock trades at about 19 times its 2015-16 expected earnings, implying a discount of over 10 per cent on its historical average and over 25 per cent on Sun Pharma.

Investors with a three-to-five year horizon can use any weakness in the stock as a good buying opportunity.

Improving profitability

Two years ago, Cipla announced a two-pronged strategy to improve profitability. First, the company began establishing its own marketing network overseas. Cipla is in the process of securing state licences and establishing a supply chain network in the US to meet large-volume commitments to retail giants such as Walmart and Walgreens.

Recently, the company also acquired a majority stake in two drug distribution firms in Yemen and Sri Lanka to strengthen its distribution channel.

Second, Cipla has made efforts to improve the product mix for its institutional business in South Africa. It recently won a tender worth 300 million rand (₹170 crore) to supply cardiovascular, neuropsychiatry and women’s healthcare drugs. These drugs enjoy a better operating margin than the anti-malarial and anti-retroviral (for HIV) drugs that the company has traditionally supplied.

Revenue drivers

Cipla has filed for approval of over 10 inhaler products in the EU, including a generic version of GSK’s blockbuster, Seretide (branded sales of $2.4 billion). The company has also filed for a generic version of AstraZeneca’s Symbicort brand (global sales of $3.5 billion in 2013).

Given that many of these were filed four-five years back, approval for a select few by end 2014-15/early 2015-16, may provide a big boost to Cipla’s earnings, beginning 2015-16.

Growth in India has improved over the last few quarters aided by product launches and better productivity of the sales force.

Also, deals with leading innovators such as the recent one with Merck Sharp and Dohme to sell a patented HIV drug (Raltegravir) should help Cipla sustain healthy growth. Strong margins in the domestic market, will boost the company’s profits.