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For 3QFY2011, Cipla reported lower-than-expected numbers, majorly on
account of higher-than-expected employee expenses. The Indore SEZ (`900cr
invested) is expected to contribute from FY2012, which would boost the
company’s overall growth and margins. We recommend Buy with a Target Price
of `388, valuing the stock at 18.4x FY2012E earnings.
Results impacted by increased employee costs: Cipla reported net sales of
`1,501cr (`1,334cr), below our estimates of `1,552cr. With gross margins being
flat at 53.7% (53.5%), OPM declined to 17.7% yoy (21.2%), majorly due to
increased employee and other expenses. Exports realisations also took a hit due
to a 4% appreciation in the rupee. The technical know-how fees reported a drop
of 78.5% to `15.1cr (`70.3cr) on account of a higher comparative base yoy,
which included one-time fees reported in 3QFY2010. Consequently, net profit
also came in below our estimates at `233cr (`288.5cr), a drop of 19.4% during
the quarter.
Outlook and valuation: We maintain our estimates of net sales posting a 14.4%
CAGR to `7,009cr and EPS to record a 14.4% CAGR to `17.6 over
FY2010–12E. The stock is trading at 24.9x and 18.4x FY2011E and FY2012E
earnings, respectively. We recommend Buy on the stock with a Target Price
of `388.
OPM drops due to Indore SEZ commercialisation costs: Cipla’s OPM dropped to
17.7% (21.2%) during the quarter, on account of increased factory overheads at
the Indore SEZ, with employee costs increasing by 52% to `135cr (`92cr) as well
as other expenses increasing by 17.3% to `405cr (`345cr). The company indicated
that it has incurred `25cr–30cr as overheads (excluding salary cost) on Indore SEZ
for the quarter without any commensurate revenue flow.
Net profit impacted by lower technical know-how fees: Cipla reported net profit of
`233cr (`289cr), down 19.4% yoy, during the quarter. This was on the back of
lower-than-expected technical know-how fees, which declined by 78.5% yoy to
`15cr (`70.3cr). Going forward, the company expects the technical know-how fees
to increase with the commercialisation of products that are currently in the pipeline
for the regulated markets, though at a slower pace compared to the past. Also,
depreciation expenses increased by 43% to `65cr (`46cr), factoring the addition of
fixed assets on account of the Indore SEZ commercialisation.
Concall takeaways
The company did not enter into any new partnership in 9MFY2011.
Management indicated having 22 partners for the US markets and around 50
for the European markets.
As of 3QFY2011, Cipla reported to have 64 ANDAs approved and 46 under
the registration process.
Revenue from the Indore SEZ should start coming in post its ramp up and
optimisation, estimated to take a year’s time. Management indicated around
10% contribution to the revenue to start coming in from FY2013E.
In terms of inhalers, management indicated that 5–6 products are at different
stages of approvals, expecting a few to commercialise by next year. For
combination inhalers for the European markets, management indicated
having submitted dossiers for a few, with the others being in different stages of
trials.
Investment arguments
Export segment to be the growth driver: Cipla exports to over 175 countries,
with growth coming through marketing alliances and distribution tie-ups in
various markets. Currently, exports contribute 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 64 approved ANDAs, of which 35 have been launched, while
46 are pending for approval. Further, Cipla has launched Salbutamol inhalers
in the UK and has 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 the 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 consists of 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 rural areas and plans to expand its product portfolio by
launching biosimilars, particularly relating to the oncology, anti-asthmatic and
anti-arthritis categories.
Return ratios to improve going ahead: 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, as well as for
setting up new facilities in Sikkim and Indore. While Cipla has already
commenced the Sikkim plant, the Indore SEZ has also commenced operations.
With significant capex been incurred and with most of the facilities
commercialised, management expects Cipla’s return ratio to improve as
productivity level increases.
Valuation: For FY2011, Cipla has guided for 8–10% overall revenue, including
domestic growth of 8–10% and export growth of 10–12%. The company
expects to maintain its current OPM of 20% (excluding the tech fees) for
FY2011 also. Our FY2011 revenue estimates are higher than the company’s
guidance as we factor in higher revenue growth on the domestic front. Further,
post the commencement of revenue flow from Indore SEZ in FY2012, we
expect OPM (ex technical know-how fees) to expand from 20.2% to 22.4% in
FY2012. As a result, we now estimate net sales to post a 14.4% CAGR to
`7,009cr and EPS to record a 14.4% CAGR to `17.6 over FY2010–12E. The
stock is trading at 24.9x and 18.4x FY2011E and FY2012E earnings,
respectively. We recommend Buy on the stock with a Target Price of `388.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cipla – 3QFY2011 Result Update
Angel Broking recommends a Buy on Cipla with a Target Price of Rs. 388.
For 3QFY2011, Cipla reported lower-than-expected numbers, majorly on
account of higher-than-expected employee expenses. The Indore SEZ (`900cr
invested) is expected to contribute from FY2012, which would boost the
company’s overall growth and margins. We recommend Buy with a Target Price
of `388, valuing the stock at 18.4x FY2012E earnings.
Results impacted by increased employee costs: Cipla reported net sales of
`1,501cr (`1,334cr), below our estimates of `1,552cr. With gross margins being
flat at 53.7% (53.5%), OPM declined to 17.7% yoy (21.2%), majorly due to
increased employee and other expenses. Exports realisations also took a hit due
to a 4% appreciation in the rupee. The technical know-how fees reported a drop
of 78.5% to `15.1cr (`70.3cr) on account of a higher comparative base yoy,
which included one-time fees reported in 3QFY2010. Consequently, net profit
also came in below our estimates at `233cr (`288.5cr), a drop of 19.4% during
the quarter.
Outlook and valuation: We maintain our estimates of net sales posting a 14.4%
CAGR to `7,009cr and EPS to record a 14.4% CAGR to `17.6 over
FY2010–12E. The stock is trading at 24.9x and 18.4x FY2011E and FY2012E
earnings, respectively. We recommend Buy on the stock with a Target Price
of `388.
Results impacted by higher employee costs: Cipla reported net sales of `1,501cr
(`1,334cr) in 3QFY2011, below our estimates of `1552cr mainly led by the
higher-than-expected employee expenses during the quarter. The domestic
formulations segment grew by 11.3% to `734cr (`659cr).
On the exports front, despite the 4% appreciation in the rupee, which impacted
realisations, overall exports increased by 12% to `782cr (`699cr); however, this
was below our estimates of `832cr. The formulations segment reported 11.7% yoy
growth in export sales to `643cr (`576cr) and API sales reported 12.8% growth to
`139cr (`123cr).
The technical know-how fees also dropped by 78.5% yoy to `15.1cr (`70.3cr) on
account of the higher comparative base yoy, which included one-time fees
reported in 3QFY2010.
OPM drops due to Indore SEZ commercialisation costs: Cipla’s OPM dropped to
17.7% (21.2%) during the quarter, on account of increased factory overheads at
the Indore SEZ, with employee costs increasing by 52% to `135cr (`92cr) as well
as other expenses increasing by 17.3% to `405cr (`345cr). The company indicated
that it has incurred `25cr–30cr as overheads (excluding salary cost) on Indore SEZ
for the quarter without any commensurate revenue flow.
Net profit impacted by lower technical know-how fees: Cipla reported net profit of
`233cr (`289cr), down 19.4% yoy, during the quarter. This was on the back of
lower-than-expected technical know-how fees, which declined by 78.5% yoy to
`15cr (`70.3cr). Going forward, the company expects the technical know-how fees
to increase with the commercialisation of products that are currently in the pipeline
for the regulated markets, though at a slower pace compared to the past. Also,
depreciation expenses increased by 43% to `65cr (`46cr), factoring the addition of
fixed assets on account of the Indore SEZ commercialisation.
Concall takeaways
The company did not enter into any new partnership in 9MFY2011.
Management indicated having 22 partners for the US markets and around 50
for the European markets.
As of 3QFY2011, Cipla reported to have 64 ANDAs approved and 46 under
the registration process.
Revenue from the Indore SEZ should start coming in post its ramp up and
optimisation, estimated to take a year’s time. Management indicated around
10% contribution to the revenue to start coming in from FY2013E.
In terms of inhalers, management indicated that 5–6 products are at different
stages of approvals, expecting a few to commercialise by next year. For
combination inhalers for the European markets, management indicated
having submitted dossiers for a few, with the others being in different stages of
trials.
Investment arguments
Export segment to be the growth driver: Cipla exports to over 175 countries,
with growth coming through marketing alliances and distribution tie-ups in
various markets. Currently, exports contribute 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 64 approved ANDAs, of which 35 have been launched, while
46 are pending for approval. Further, Cipla has launched Salbutamol inhalers
in the UK and has 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 the 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 consists of 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 rural areas and plans to expand its product portfolio by
launching biosimilars, particularly relating to the oncology, anti-asthmatic and
anti-arthritis categories.
Return ratios to improve going ahead: 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, as well as for
setting up new facilities in Sikkim and Indore. While Cipla has already
commenced the Sikkim plant, the Indore SEZ has also commenced operations.
With significant capex been incurred and with most of the facilities
commercialised, management expects Cipla’s return ratio to improve as
productivity level increases.
Valuation: For FY2011, Cipla has guided for 8–10% overall revenue, including
domestic growth of 8–10% and export growth of 10–12%. The company
expects to maintain its current OPM of 20% (excluding the tech fees) for
FY2011 also. Our FY2011 revenue estimates are higher than the company’s
guidance as we factor in higher revenue growth on the domestic front. Further,
post the commencement of revenue flow from Indore SEZ in FY2012, we
expect OPM (ex technical know-how fees) to expand from 20.2% to 22.4% in
FY2012. As a result, we now estimate net sales to post a 14.4% CAGR to
`7,009cr and EPS to record a 14.4% CAGR to `17.6 over FY2010–12E. The
stock is trading at 24.9x and 18.4x FY2011E and FY2012E earnings,
respectively. We recommend Buy on the stock with a Target Price of `388.
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