Anand Rathi: Cipla Valuations stretched, weak growth outook; initiate with Sell

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄


Cipla
Valuations stretched, weak growth outook; initiate with Sell
We initiate coverage on Cipla with a Sell rating and target price
of `308 per share. We are negative on the stock, given muted
growth outlook (10.2% revenue CAGR), deteriorating asset
turnover, declining return ratios and stretched valuations (21.4x
FY12e).
 Expect muted growth. We expect Cipla to report only 10.2%
revenue CAGR over FY10-13e due to high base in domestic
formulations (5.38% market share), delay in commercialisation of
new capacity at Indore, peaking technical-knowhow fee income and
lack of near-term growth triggers.
 Inhalers – No immediate upside. We believe inhalers can be a huge
opportunity for Cipla, but only in FY13e or later. We do not expect any
major near-term upside as the first combination inhaler is expected in
FY13e. The company is working on nine products for European markets
that have cumulative innovator market size of ~US$3bn.
 Declining return ratios and asset turnover. Asset turnover has
been consistently falling, from3.5x in FY05 to 2.8x in FY10, and we
expect it further fall to 2.5x in FY12e due to muted growth and 45%
of inhalers capacity remaining unutilised. Also, we expect RoE to
decline to 16.3% in FY13e from 24.5% in FY07.
 Valuation and risks. We value Cipla at `308/share based on 20x
FY12E earnings. At CMP, the stock trades at 23.8x FY11e and 21.4x
FY12e earnings, which look stretched considering muted growth and
past 3-year average forward PE of 20x. Any large products supply
deal with an MNC would provide upside risk to our estimates.