Cipla -Lackluster PAT despite topline surprise. : Kotak Sec

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


Cipla (CIPLA)
Pharmaceuticals
Lackluster PAT despite topline surprise. Cipla sales beat estimates (up 15% yoy) primarily
on momentum in its domestic business (up 21% yoy). However, PAT missed our estimates by
13% on account of (1) Indore SEZ related staff expenses, (2) lower technology licensing fee, and
(3) higher depreciation at the Indore SEZ plant. We believe the stock offers little value at current
levels given its inferior growth outlook relative to peers. We maintain our REDUCE rating and
estimates with a price target of Rs295.





Domestic formulations growth beats estimates
Domestic formulation was the biggest surprise in the quarter. After recording sluggish growth in
the domestic market for six quarters, domestic formulation growth bounced back sharply with
branded generics (+19%) and generics (+27%) contributing to overall growth of 21%.Given that
this turnaround comes after a prolonged slowdown in the segment, we will await more evidence
to increase our full-year growth assumptions. (11%)

Negative operating leverage on account of Indore SEZ
Overheads at the newly commissioned Indore SEZ adversely hit profitability. The facility is yet to
contribute to revenues while overheads relating to staff expenses have already started hitting the
cost structure. The optimal utilization of this facility is still 12-18 months away and a ramp-up in
sales depends on regulatory approvals.

Technology fee disappointment
Cipla recorded low Technology licensing fee income for the quarter (other operating income down
51% yoy ).We believe that lower dependence on this is a long-term positive given the volatility
and uncertainty associated with this segment. The management guided for the annual technology
licensing fee coming down progressively to Rs.1 bn.

Catalysts some distance away: Maintain REDUCE rating and price target
Cipla trades in line with the sector average despite offering relatively inferior growth prospects. A
pick up in the growth trajectory is incumbent on ramping up of the Indore SEZ facility, launch of
inhalers in Europe and a potential supply arrangement with a Big Pharma player. Given the lack of
visibility on these drivers, we reiterate our REDUCE rating on the stock with a price yarget of
Rs295.