CIPLA- Mixed performance :: Edelweiss

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


CIPLA
Mixed performance


�� Strong revenue growth offset by higher overheads from SEZ facility
Cipla’s Q2FY11 results were mixed, with net revenues (ex-tech fees) of INR 16
bn (15% Y-o-Y growth), higher than our estimate of INR 15.2 bn. This was led
by higher growth in domestic and export formulations business. EBITDA (ex-tech
fees and forex) at INR 3.4 bn (5% Y-o-Y growth) was lower than our estimate of
INR 3.5 bn, as increase in overheads from the Indore SEZ facility and
unfavorable currency movement offset impressive revenue growth; EBITDA
margins (ex tech fees and forex) at 21.2% declined 260bps Q-o-Q. PAT, at INR
2.6 bn, declined 5% Y-o-Y growth, 9% lower than our estimate of INR 290 mn,
and includes INR 150 mn forex gain (not factored in our estimate). Tech fees
continued to disappoint and was at INR 120 mn against our estimates of INR 335
mn.


�� Impressive revenue growth, but tech income disappoints
Domestic formulation grew 20% Y-o-Y (versus our estimate of 8%), led by
strong growth in branded (19% Y-o-Y) as well as generics (27% Y-o-Y). Export
formulation business continues to do well and reported strong growth (14% Y-o-
Y); this was, however, offset by flat API sales. Higher ramp up from the Indore
SEZ facility and incremental supplies of Seroflo (salmeterol and fluticasone)
inhalers to South Africa/CIS are likely to drive higher growth in H2FY11.
However, the company has maintained its 8-10% growth guidance for FY11.

�� Revising down FY11-12E to factor in higher fixed costs from Indore SEZ
We are revising down our FY11/12 estimates by 3-7% to factor in higher fixed
costs, despite marginally increasing our sales assumptions from domestic and
export formulations. The Indore SEZ commercialization has short-term negative
margin impact, which will be mitigated as regulated market revenues pick up from
FY12-13. We are also revising down our estimate of tech fees to USD 15 mn (from
USD 25 mn earlier) in FY11 and FY12.

�� Outlook and valuations: Expensive; maintain ‘REDUCE’
While Indore SEZ commercialization improves medium term visibility on export
formulations and domestic formulation growth in the current quarter is a positive,
we prefer to be cautious and wait for more long term growth drivers to justify
current valuations. Key risk to our call is timely approval of inhalers for EU and/or
long-term partnerships with innovator companies, which could add large upsides to
our estimates. We maintain ‘REDUCE’ recommendation and increase our target
price to INR 300 (INR 270 earlier), valuing the company at 20x FY12E fully diluted
earnings. We rate the stock ’Sector Underperformer’ on relative return basis.