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Cipla – 2QFY2011 Result Update
Angel Broking recommends a Buy on Cipla with a Target Price of Rs388.
We are positively surprised by Cipla results both on the top-line and OPM front.
Top-line growth was buoyed by the domestic business where management
expects the momentum to continue, while OPM (ex-technical know-how fees)
adjusting for the Indore SEZ overhead costs (`25-30cr for the quarter) stood in
the range of 22.5-23% for the quarter. The Indore SEZ (`1,000cr invested) is
expected to contribute from FY2012 onwards and boost overall growth and
margins. We recommend a Buy on the stock.
Strong results: Cipla reported net sales of `1,580cr (`1,371cr), which was
higher than our estimate on the back of the strong traction seen on the
domestic and export formulation fronts. The company expects the growth
momentum on the domestic front to continue going forward as well. Cipla
reported OPM (ex-technical know-how fees) of 21.0% (22.5%), which
contracted by 159bp yoy due to the overheads at the Indore SEZ, but was flat
sequentially. Adjusting for the fixed overheads at the Indore SEZ, OPM for
the quarter stood in the range of 22.5-23%. Cipla reported net profit of
`263cr (`276cr), down 4.6% yoy on the back of the lower-than-expected
technical know-how fees.
Outlook and Valuation: We estimate net sales to post 14.4% CAGR to
`7,009cr and EPS to record 14.5% CAGR to `17.6 over FY2010–12. At
current levels, the stock is trading at 25.5x and 18.8x FY2011E and FY2012E
earnings, respectively. We recommend a Buy on the stock, with a revised
Target Price of `388 (`360), valuing the company at 22x FY2012E earnings.
The Indore SEZ (`1,000cr invested) is expected to contribute from FY2012
onwards and boost overall growth and margins for the company.
Investment Arguments
Exports to drive growth: Cipla exports to more than 175 countries, with growth
coming through the marketing alliances and distribution tie-ups in the various
markets. Exports contributed 54% of the total turnover of FY2010, with Africa,
US and Latin America constituting more than 60% of total exports. In the US,
Cipla has entered into a partnership with 22 players and has cumulative 57
approved ANDAs, of which 35 have been launched, while 41 are pending for
approval. Further, Cipla has launched Salbutamol inhalers in the UK and
received approvals for Budesonide inhalers in Germany and Portugal and
Beclomethasone in Portugal. Cipla has developed eight CFC-free inhalers for
the EU region, of which six have been submitted for regulatory approvals.
Launch of CFC-free inhalers in Europe and US with a potential market size of
more than US $3bn would be the long-term growth driver for the company.
Management has also indicated that it is negotiating with MNCs such as
Pfizer, GSK and Boehringer for long-term supply agreements.
Increasing penetration in domestic market: Cipla is one of the largest players
in the domestic formulation market, with a market share of around 5%
contributing 46% of the total turnover in FY2010. The company is the market
leader in key therapeutic areas such as respiratory care, anti-viral and
urological. Cipla’s distribution network in India comprises a field force of
around 5,100 employees and 42 exclusive and dedicated sales depots, as well
as approximately 2,300 stockists and 160,000 chemists. Cipla plans to focus
on growing its market share and sales by increasing penetration in the Indian
market, especially in the rural areas. It has plans to expand its product
portfolio by launching biosimilars, particularly relating to the oncology, antiasthmatic
and anti-arthritis categories.
Return ratios to improve: Since FY2006, Cipla has incurred capex of `2,500cr
(71% of GFA) for upgrading its existing manufacturing facilities at Kurkumbh,
Patalganga, Bengaluru, Goa and Baddi, and for setting up new facilities in
Sikkim and Indore. While Cipla has already commenced the Sikkim plant, it
expects the Indore SEZ to commence operations in FY2011. With significant
capex already incurred and with most of the facilities commercialised,
management expects return ratio to improve as productivity levels increase.
Outlook and Valuation
For FY2011, Cipla has guided for 8–10% growth in overall revenues,
including domestic growth of 8–10% and export growth of 10–12%. The
company expects to maintain OPM at 20% (excluding the tech fees) level for
FY2011. Our FY2011 revenue estimates are higher than company’s guidance
as we factor in higher revenue growth on the domestic front. Further post
commencement of revenue flow from the Indore SEZ FY2012 onwards, we
expect OPM (ex-technical know-how fees) to expand to 22.4% from 20.2%
expected in FY2011. As a result, we now estimate net sales to post 14.4%
CAGR to `7,009cr and EPS to record 14.5% CAGR to `17.6 over
FY2010–12. At current levels, the stock is trading at 25.5x and 18.8x FY2011E
and FY2012E earnings, respectively. We recommend a Buy on the stock, with
a revised Target Price of `388 (`360), valuing the stock at 22x FY2012E
earnings.
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