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Lower tech income and higher overheads dent performance
Cipla’s Q3FY11 results were below expectations with revenue growth of 11.6% to
INR 15 bn, lower than our expectation of INR 15.4 bn on account of lower–thanexpected
growth in the domestic market. EBIDTA, at INR 3.2 bn (EBIDTA margin
of 20.5%), was lower than our estimate of INR 3.96 bn (EBIDTA margin of
24.6%), impacted by: (a) lower licencing income (down 78% Y-o-Y); (b) higher
employee (up 52%) and overhead costs (up 18%) on account of the Indore SEZ
facility (impact of ~INR 250 mn in EBIDTA); and (c) adverse currency
movement. EBITDA margins (ex-tech fees) at 17.5% (down 250bps Q-o-Q) were
also impacted because of adverse product mix. Despite higher other income (up
44% Y-o-Y) and lower tax provision, PAT at INR 2.3 bn declined 20% Y-o-Y on
account of: (i) 44% increase in depreciation cost (due to Indore SEZ); and (ii)
poor operating performance. Tech fees continued to disappoint and was at INR
151 mn against our estimate of INR 400 mn.
Sub-par domestic performance impacted revenue growth
Despite extended monsoon and cold in North India, Cipla’s domestic business
grew 11%, below our estimate of 16%. We had expected the company to report
strong growth in the domestic business because of its strong franchises with
chest physicians and good season for anti-asthma products. Management has
indicated that though branded formulation business grew 15-16%, generic
business impacted growth. Export formulation business continued to do well and
grew 12%. Higher ramp-up from Indore SEZ facility and incremental supplies of
Seroflo inhalers to CIS are likely to drive growth in export FY12 onwards.
Revising down FY11 and FY12 earnings estimates
We are revising down our FY11 and FY12 estimates 5% and 4%, respectively, to
factor in higher fixed costs and lower licensing income. Indore SEZ’s
commercialization has short-term negative margin impact, which will be mitigated
as regulated market revenues pick up from FY12-13. Management has guided that
in the first year of the SEZ’s operation, it expects revenue contribution of 8-10% of
overall revenue (expect contribution to start in next 3-4 quarters).
Outlook and valuations: Expensive; maintain ‘REDUCE’
While recent Indore commercialization improves medium-term visibility on export
formulations, we would prefer to be cautious and wait for more long-term growth
drivers to justify current valuations. Key risk to our call is timely approvals 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 target price of INR 300, valuing the company at 20x FY12E EPS. We rate the
stock ‘Sector Underperformer’ on relative return basis.
Lower licensing income and higher overheads impacted operating performance
Cipla’s Q3FY11 operating performance was largely impacted because of: (a) lower
licencing income (down 78% Y-o-Y) and higher overheads on account of Indore SEZ
facility (incremental cost of INR 450 mn including INR 200 mn of depreciation). Despite
11.6% growth in revenue, EBIDTA was up just 4% to INR 3.2 bn (estimate INR 3.96
bn), as employee cost and other expenditures jumped 52% and 17%, respectively.
EBITDA (ex-tech fees and forex gain) of INR 2.7 bn (down 7% Y-o-Y) was lower than our
estimate of INR 3.3 bn. EBITDA margins (ex-tech fees) at 17.5% declined 230bps Q-o-Q
led by higher fixed costs from commercialization of the Indore SEZ facility. Employee
cost surged on account of increase in manpower in SEZ, regrouping of contractual staff
at Goa facilities, and annual increments. Other expenditure of INR 4.05 bn increased
12% Q-o-Q with incremental INR 250 mn fixed costs from the SEZ facility. Further,
currency appreciation adversely impacted revenue realization by 4-5%, impacting overall
margins.
Despite higher other income (up 44% Y-o-Y) and lower tax provision (15.6% of PBT
versus 16.9% of PBT in Q3FY10), PAT at INR 2.3 bn declined 20% Y-o-Y on account of:
(i) 44% increase in depreciation cost (due to Indore SEZ) and (ii) poor operating
performance. Tech fees continued to disappoint and were at INR 151 mn against our
estimate of INR 400 mn. Overall, we expect licensing income to be at INR 750 mn for
FY11E.
Sub-par domestic performance impacted revenue growth
Despite extended monsoon and cold in North India, Cipla’s domestic business grew 11%,
below our estimate of 16%. We had expected the company to report strong growth in
domestic business because of its strong franchises with chest physicians and good
season for anti-asthma products. Management has indicated that though branded
formulation business grew 15-16%, generic business impacted growth. We believe
though Cipla’s focus portfolio (50% of domestic revenue) is growing ahead of market
(18-20%), it is the balance 50% portfolio (matured brands and generic business) is
either declining or barely holding revenue.
Export formulation business continues to do well and grew 12%. Higher ramp-up from
Indore SEZ facility post regulatory approvals and incremental supplies of Seroflo
(salmeterol and fluticasone) inhalers to South Africa/CIS is likely to drive higher growth
for balance FY11. However, the company maintains its growth guidance of 8-10% for
FY11.
Revising down 5%/4% for FY11/12E
We are revising down our FY11 and FY12 estimates 5% and 4%, respectively, to factor in
higher fixed costs and lower licensing income. Indore SEZ’s commercialization has shortterm
negative margin impact, which will be mitigated as regulated market revenues pick
up from FY12-13. Management has guided that in the first year of the SEZ’s operation, it
expects revenue contribution of 8-10% of overall revenue (expect contribution to start in
next 3-4 quarters). Cipla has invested over INR 8-9 bn on Indore SEZ and at peak
capacity, expects revenue contribution of INR 20 bn in the next 3-4 years. We have also
introduced our FY13E numbers with an EPS of INR 18.3.
Moderate outlook; aerosol opportunity in EU is still 15-18 months away
Management has guided for 8-10% growth in revenue driven by 10% growth in domestic
business, 10-12% growth in export business, and INR 750 mn-1 bn from licencing
income. The supply of Seroflo inhaler to South Africa has already started (USD15-20mn
market) and the company is looking to launch the same in the CIS market (USD 10 mn
15 mn market) and Salmetrol inhaler in some EU markets (total market size of USD 150
mn in EU zone). Though inhalers for US and EU could be a large opportunity, given the
regulatory framework, this opportunity is still 15-18 months away.
Outlook and valuations: Expensive; maintain ‘REDUCE’
While recent Indore commercialization improves medium-term visibility on export
formulations, we would prefer to be cautious and wait for more long-term growth drivers
to justify current valuations. Key risk to our call is timely approvals 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 target price of INR 300,
valuing the company at 20x FY12E EPS. We rate the stock ‘Sector Underperformer’ on
relative return basis.
Other key highlights
• Confident of monetizing the combination inhalers opportunity in regulated markets.
Expect Salmetrol fluticasone combination inhalers in next 18-24 months in the EU
region.
• Salmetrol fluticasone inhalers already launched in South Africa. Cipla is also going to
launch the same combination in CIS countries from Q4FY11. Management expects
meaningful contribution from these launches in the next 2-3 quarters.
• A key trigger would be commencement of API supplies to Teva for Zyprexa’s 180-day
exclusivity. Zyprexa is USD 1.7 bn drug in the US. Cipla can rake in significant
revenues if Teva can successfully commercialize the product in mid 2012. Cipla can
potentially generate revenues of INR 2.0 bn by supplying API to Teva during 180
days exclusivity.
• Indore SEZ has received approvals from WHO and MCC (South Africa) with likely
approvals from UK and Australia expected in the next few months; estimated time
horizon of 1-2 years for all major regulatory approvals. Currently, the SEZ is EBITDA
negative with quarterly fixed costs (excl employees) of INR 250 mn.
• Forex hedges of USD 190 mn covering current average debtors.
Company Description
Owned and managed by Dr. Y.K. Hamied, a second generation entrepreneur, Cipla is
India’s third largest company by domestic sales. Cipla’s revenues (excluding tech fees)
and profits have posted 17% and 13% CAGR in FY06-10, to INR 65 bn and INR 12 bn in
FY10 respectively. Cipla’s domestic formulations contribute 46% to total FY10 revenues
(excluding tech fees) and have posted 14% CAGR in FY06-10. With a market share of
~5%, Cipla is the third largest player in the Indian market, with leadership positions in
ARTs, respiratory and urology. Cipla’s export sales (excluding tech fees) have grown at
22% CAGR during FY06-10, to INR 28 bn, in FY10. Africa, with 34% share, is the largest
contributor to exports, followed by the Americas (26%) and Europe (17%).
Investment Theme
We expect Cipla gross sales to grow at 14% CAGR during FY10-13E, to INR 82 bn by
FY13E, led by 15% CAGR in domestic branded formulation and export formulations
business to INR 37 bn and INR 36 bn, respectively. Bulk business is expected to grow at
9% CAGR in FY10-13E. We expect net profit to grow at 14% CAGR in FY10-13E to INR
14.7 bn in FY13E. We believe Cipla’s current growth profile does not justify its current
valuations. Key risk to our call is timely approvals of inhalers for EU and/or long-term
partnerships with innovator companies, which could add large upsides to our estimates.
Key Risks
Large contracts, especially through government tenders, could increase exports
Large contracts, especially in ART and to some extent in the swine flu segment could
have a disproportionate impact on Cipla’s revenues. These contracts are based on
funding programs that are difficult to predict.
INR movement may affect export formulations sales
Cipla’s export formulations in FY10 were affected by sharp movement of the INR, which
appreciated from INR 50 in end FY09 to INR 45 by end FY10, leading to a negative
impact of 10-11% on export growth. We highlight that our FY11E international revenues
factor in a USD/INR appreciation of 5% Y-o-Y to INR 44.8, which reduces our revenue
growth assumptions in FY11E. Any reversal of such a trend would have a beneficial
impact on Cipla’s numbers.
Strong growth in export formulation sales
Strong, unanticipated growth in export contracts, especially as only 37 products out of a
product basket of 118 products have been launched in the US. Inhaler opportunity in
Europe could be significant but are contingent on long-pending approvals.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lower tech income and higher overheads dent performance
Cipla’s Q3FY11 results were below expectations with revenue growth of 11.6% to
INR 15 bn, lower than our expectation of INR 15.4 bn on account of lower–thanexpected
growth in the domestic market. EBIDTA, at INR 3.2 bn (EBIDTA margin
of 20.5%), was lower than our estimate of INR 3.96 bn (EBIDTA margin of
24.6%), impacted by: (a) lower licencing income (down 78% Y-o-Y); (b) higher
employee (up 52%) and overhead costs (up 18%) on account of the Indore SEZ
facility (impact of ~INR 250 mn in EBIDTA); and (c) adverse currency
movement. EBITDA margins (ex-tech fees) at 17.5% (down 250bps Q-o-Q) were
also impacted because of adverse product mix. Despite higher other income (up
44% Y-o-Y) and lower tax provision, PAT at INR 2.3 bn declined 20% Y-o-Y on
account of: (i) 44% increase in depreciation cost (due to Indore SEZ); and (ii)
poor operating performance. Tech fees continued to disappoint and was at INR
151 mn against our estimate of INR 400 mn.
Sub-par domestic performance impacted revenue growth
Despite extended monsoon and cold in North India, Cipla’s domestic business
grew 11%, below our estimate of 16%. We had expected the company to report
strong growth in the domestic business because of its strong franchises with
chest physicians and good season for anti-asthma products. Management has
indicated that though branded formulation business grew 15-16%, generic
business impacted growth. Export formulation business continued to do well and
grew 12%. Higher ramp-up from Indore SEZ facility and incremental supplies of
Seroflo inhalers to CIS are likely to drive growth in export FY12 onwards.
Revising down FY11 and FY12 earnings estimates
We are revising down our FY11 and FY12 estimates 5% and 4%, respectively, to
factor in higher fixed costs and lower licensing income. Indore SEZ’s
commercialization has short-term negative margin impact, which will be mitigated
as regulated market revenues pick up from FY12-13. Management has guided that
in the first year of the SEZ’s operation, it expects revenue contribution of 8-10% of
overall revenue (expect contribution to start in next 3-4 quarters).
Outlook and valuations: Expensive; maintain ‘REDUCE’
While recent Indore commercialization improves medium-term visibility on export
formulations, we would prefer to be cautious and wait for more long-term growth
drivers to justify current valuations. Key risk to our call is timely approvals 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 target price of INR 300, valuing the company at 20x FY12E EPS. We rate the
stock ‘Sector Underperformer’ on relative return basis.
Lower licensing income and higher overheads impacted operating performance
Cipla’s Q3FY11 operating performance was largely impacted because of: (a) lower
licencing income (down 78% Y-o-Y) and higher overheads on account of Indore SEZ
facility (incremental cost of INR 450 mn including INR 200 mn of depreciation). Despite
11.6% growth in revenue, EBIDTA was up just 4% to INR 3.2 bn (estimate INR 3.96
bn), as employee cost and other expenditures jumped 52% and 17%, respectively.
EBITDA (ex-tech fees and forex gain) of INR 2.7 bn (down 7% Y-o-Y) was lower than our
estimate of INR 3.3 bn. EBITDA margins (ex-tech fees) at 17.5% declined 230bps Q-o-Q
led by higher fixed costs from commercialization of the Indore SEZ facility. Employee
cost surged on account of increase in manpower in SEZ, regrouping of contractual staff
at Goa facilities, and annual increments. Other expenditure of INR 4.05 bn increased
12% Q-o-Q with incremental INR 250 mn fixed costs from the SEZ facility. Further,
currency appreciation adversely impacted revenue realization by 4-5%, impacting overall
margins.
Despite higher other income (up 44% Y-o-Y) and lower tax provision (15.6% of PBT
versus 16.9% of PBT in Q3FY10), PAT at INR 2.3 bn declined 20% Y-o-Y on account of:
(i) 44% increase in depreciation cost (due to Indore SEZ) and (ii) poor operating
performance. Tech fees continued to disappoint and were at INR 151 mn against our
estimate of INR 400 mn. Overall, we expect licensing income to be at INR 750 mn for
FY11E.
Sub-par domestic performance impacted revenue growth
Despite extended monsoon and cold in North India, Cipla’s domestic business grew 11%,
below our estimate of 16%. We had expected the company to report strong growth in
domestic business because of its strong franchises with chest physicians and good
season for anti-asthma products. Management has indicated that though branded
formulation business grew 15-16%, generic business impacted growth. We believe
though Cipla’s focus portfolio (50% of domestic revenue) is growing ahead of market
(18-20%), it is the balance 50% portfolio (matured brands and generic business) is
either declining or barely holding revenue.
Export formulation business continues to do well and grew 12%. Higher ramp-up from
Indore SEZ facility post regulatory approvals and incremental supplies of Seroflo
(salmeterol and fluticasone) inhalers to South Africa/CIS is likely to drive higher growth
for balance FY11. However, the company maintains its growth guidance of 8-10% for
FY11.
Revising down 5%/4% for FY11/12E
We are revising down our FY11 and FY12 estimates 5% and 4%, respectively, to factor in
higher fixed costs and lower licensing income. Indore SEZ’s commercialization has shortterm
negative margin impact, which will be mitigated as regulated market revenues pick
up from FY12-13. Management has guided that in the first year of the SEZ’s operation, it
expects revenue contribution of 8-10% of overall revenue (expect contribution to start in
next 3-4 quarters). Cipla has invested over INR 8-9 bn on Indore SEZ and at peak
capacity, expects revenue contribution of INR 20 bn in the next 3-4 years. We have also
introduced our FY13E numbers with an EPS of INR 18.3.
Moderate outlook; aerosol opportunity in EU is still 15-18 months away
Management has guided for 8-10% growth in revenue driven by 10% growth in domestic
business, 10-12% growth in export business, and INR 750 mn-1 bn from licencing
income. The supply of Seroflo inhaler to South Africa has already started (USD15-20mn
market) and the company is looking to launch the same in the CIS market (USD 10 mn
15 mn market) and Salmetrol inhaler in some EU markets (total market size of USD 150
mn in EU zone). Though inhalers for US and EU could be a large opportunity, given the
regulatory framework, this opportunity is still 15-18 months away.
Outlook and valuations: Expensive; maintain ‘REDUCE’
While recent Indore commercialization improves medium-term visibility on export
formulations, we would prefer to be cautious and wait for more long-term growth drivers
to justify current valuations. Key risk to our call is timely approvals 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 target price of INR 300,
valuing the company at 20x FY12E EPS. We rate the stock ‘Sector Underperformer’ on
relative return basis.
Other key highlights
• Confident of monetizing the combination inhalers opportunity in regulated markets.
Expect Salmetrol fluticasone combination inhalers in next 18-24 months in the EU
region.
• Salmetrol fluticasone inhalers already launched in South Africa. Cipla is also going to
launch the same combination in CIS countries from Q4FY11. Management expects
meaningful contribution from these launches in the next 2-3 quarters.
• A key trigger would be commencement of API supplies to Teva for Zyprexa’s 180-day
exclusivity. Zyprexa is USD 1.7 bn drug in the US. Cipla can rake in significant
revenues if Teva can successfully commercialize the product in mid 2012. Cipla can
potentially generate revenues of INR 2.0 bn by supplying API to Teva during 180
days exclusivity.
• Indore SEZ has received approvals from WHO and MCC (South Africa) with likely
approvals from UK and Australia expected in the next few months; estimated time
horizon of 1-2 years for all major regulatory approvals. Currently, the SEZ is EBITDA
negative with quarterly fixed costs (excl employees) of INR 250 mn.
• Forex hedges of USD 190 mn covering current average debtors.
Company Description
Owned and managed by Dr. Y.K. Hamied, a second generation entrepreneur, Cipla is
India’s third largest company by domestic sales. Cipla’s revenues (excluding tech fees)
and profits have posted 17% and 13% CAGR in FY06-10, to INR 65 bn and INR 12 bn in
FY10 respectively. Cipla’s domestic formulations contribute 46% to total FY10 revenues
(excluding tech fees) and have posted 14% CAGR in FY06-10. With a market share of
~5%, Cipla is the third largest player in the Indian market, with leadership positions in
ARTs, respiratory and urology. Cipla’s export sales (excluding tech fees) have grown at
22% CAGR during FY06-10, to INR 28 bn, in FY10. Africa, with 34% share, is the largest
contributor to exports, followed by the Americas (26%) and Europe (17%).
Investment Theme
We expect Cipla gross sales to grow at 14% CAGR during FY10-13E, to INR 82 bn by
FY13E, led by 15% CAGR in domestic branded formulation and export formulations
business to INR 37 bn and INR 36 bn, respectively. Bulk business is expected to grow at
9% CAGR in FY10-13E. We expect net profit to grow at 14% CAGR in FY10-13E to INR
14.7 bn in FY13E. We believe Cipla’s current growth profile does not justify its current
valuations. Key risk to our call is timely approvals of inhalers for EU and/or long-term
partnerships with innovator companies, which could add large upsides to our estimates.
Key Risks
Large contracts, especially through government tenders, could increase exports
Large contracts, especially in ART and to some extent in the swine flu segment could
have a disproportionate impact on Cipla’s revenues. These contracts are based on
funding programs that are difficult to predict.
INR movement may affect export formulations sales
Cipla’s export formulations in FY10 were affected by sharp movement of the INR, which
appreciated from INR 50 in end FY09 to INR 45 by end FY10, leading to a negative
impact of 10-11% on export growth. We highlight that our FY11E international revenues
factor in a USD/INR appreciation of 5% Y-o-Y to INR 44.8, which reduces our revenue
growth assumptions in FY11E. Any reversal of such a trend would have a beneficial
impact on Cipla’s numbers.
Strong growth in export formulation sales
Strong, unanticipated growth in export contracts, especially as only 37 products out of a
product basket of 118 products have been launched in the US. Inhaler opportunity in
Europe could be significant but are contingent on long-pending approvals.
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