Cipla- Sell: Another Sluggish Quarter:: Citi

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Cipla (CIPL.BO)
Sell: Another Sluggish Quarter
 Still Sluggish — Cipla delivered another subdued quarter, with PAT missing our
estimate by 7%. While sales momentum recovered somewhat (bounce-back in
India), margins continued to suffer. We expect this trend to continue, especially
given the management’s indication that tech licensing income will continue to
taper off. The stock has been a big underperformer & further downside appears
limited. However, we see few catalysts to warrant a re-rating. We maintain Sell
(3M), while raising TP to Rs320 (roll over to Mar 12E).


 Sales Momentum Back, Margins Remain Subdued — Sales grew c15% YoY after
two subdued quarters, primarily on better traction in India. However, EBIDTA
margin dipped 370 bps YoY due to lower tech licensing income, stronger INR &
Indore SEZ overheads. Lower interest cost & higher other income could not offset
higher depreciation, leading to a 5% YoY dip in net income.

 India Appears Back on Track — Indian sales grew 20% YoY, with branded (+19%)
& generics (+27%) clocking healthy growth. This is despite the sale of the I-Pill
brand. The management indicated that higher growth rates should sustain. This
augurs well, given the higher margins in the Indian biz.

 Exports Mixed — Formulations exports grew c14% YoY but API exports remained
flat. This is partly due to a stronger rupee while Cipla’s decision to stay away from
low margin ARV tenders may also have contributed. Tech licensing income was
down sharply (one-off income received in 2QFY10) – mgmt indicated that this
could be in the Rs750-800m range for FY11 & may decline further going forward.

 Other key takeaways — a) Retained 8-10% sales growth guidance; b) Inhaler
product, Seroflo, to be launched in S Africa & Russia in 2H; c) Inhalers sales
could rise to c20-25% of topline (c15-17% currently) in 3 years, if EU approvals
come through; d) To launch 2 biosimilars in India in CY11; e) Indore SEZ is
EBIDTA negative on low capacity utilization – awaiting approvals from regulators.