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Cipla (CIPL.BO): Add to C-List; domestic growth to lag peers
Source of opportunity
We add Cipla to the Conviction Sell List with a lowered DC-based 12-month
TP of Rs253 (from Rs276) as we lower our revenue forecast owing to
domestic business performance, implying potential downside of 19%.
Underperformance of last 3 yrs to likely to continue: While Cipla has
outperformed the broader markets over the last 3 months (down 11% vs.
BSE Sensex down 16%) mainly due to media reports suggesting its stake
sale, we expect the stock to underperform its peers going ahead, as it has
done for each of the last ten years, owing to its lower growth prospects.
We believe Cipla’s revenue growth will continue to lag its peers as
its domestic leadership is under threat with rising competition and its
export growth continues to be muted due to product launch delays. We
cut our revenue and earnings estimates by 5%-6% and 7%-15% over
FY11E-FY13E to reflect our lower growth and margin expectations.
Catalyst
Domestic business not matching peers: We expect Cipla’s
domestic market leadership to come under threat as global pharma
looks to gain market share through acquisitions and Indian peers
like Ranbaxy, DRL, Lupin, Cadila, Sun renew their focus on the highgrowth
Indian market. Hence, we forecast Cipla’s domestic business
to grow at 14% CAGR over FY11E-FY13E while the industry grows at
mid-to-high teens.
Exports to be muted due to launch delays and limited exposure
to US patent cliff: We expect Cipla’s export business to be
hampered by delays in product launches, particularly inhalers in
Europe. Cipla is also unlikely to benefit meaningfully from the US
patent cliff as it has one of the weakest ANDA filing profiles among
its peers, thereby limiting its US exposure and growth prospects.
Capex benefits unlikely in near term; margins to remain flat:
While the commissioning of the Indore SEZ plant is positive for
Cipla in the long term, we expect limited NT impact on revenues
and margins as the plant, which is slated to cater to export markets,
is yet to receive regulatory approval from global agencies. The
recent foray into biologics is also likely to be a strain on margins
due to high initial capex and relatively long gestation period.
Valuation
32% valuation premium to peers not justified: Cipla trades at an
FY12E P/E of 20.7X, a 32% premium to peers. Our target price of Rs253
implies a FY2012E P/E multiple of 16.8X, vs. the sector at 15.5X. We
reiterate our Sell rating on Cipla and add it to our C-list as we believe
that the current valuation premium is not justified given its inferior
growth profile.
Key risks
Partnership with global pharma, earlier-than-expected product launches.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell list
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cipla (CIPL.BO): Add to C-List; domestic growth to lag peers
Source of opportunity
We add Cipla to the Conviction Sell List with a lowered DC-based 12-month
TP of Rs253 (from Rs276) as we lower our revenue forecast owing to
domestic business performance, implying potential downside of 19%.
Underperformance of last 3 yrs to likely to continue: While Cipla has
outperformed the broader markets over the last 3 months (down 11% vs.
BSE Sensex down 16%) mainly due to media reports suggesting its stake
sale, we expect the stock to underperform its peers going ahead, as it has
done for each of the last ten years, owing to its lower growth prospects.
We believe Cipla’s revenue growth will continue to lag its peers as
its domestic leadership is under threat with rising competition and its
export growth continues to be muted due to product launch delays. We
cut our revenue and earnings estimates by 5%-6% and 7%-15% over
FY11E-FY13E to reflect our lower growth and margin expectations.
Catalyst
Domestic business not matching peers: We expect Cipla’s
domestic market leadership to come under threat as global pharma
looks to gain market share through acquisitions and Indian peers
like Ranbaxy, DRL, Lupin, Cadila, Sun renew their focus on the highgrowth
Indian market. Hence, we forecast Cipla’s domestic business
to grow at 14% CAGR over FY11E-FY13E while the industry grows at
mid-to-high teens.
Exports to be muted due to launch delays and limited exposure
to US patent cliff: We expect Cipla’s export business to be
hampered by delays in product launches, particularly inhalers in
Europe. Cipla is also unlikely to benefit meaningfully from the US
patent cliff as it has one of the weakest ANDA filing profiles among
its peers, thereby limiting its US exposure and growth prospects.
Capex benefits unlikely in near term; margins to remain flat:
While the commissioning of the Indore SEZ plant is positive for
Cipla in the long term, we expect limited NT impact on revenues
and margins as the plant, which is slated to cater to export markets,
is yet to receive regulatory approval from global agencies. The
recent foray into biologics is also likely to be a strain on margins
due to high initial capex and relatively long gestation period.
Valuation
32% valuation premium to peers not justified: Cipla trades at an
FY12E P/E of 20.7X, a 32% premium to peers. Our target price of Rs253
implies a FY2012E P/E multiple of 16.8X, vs. the sector at 15.5X. We
reiterate our Sell rating on Cipla and add it to our C-list as we believe
that the current valuation premium is not justified given its inferior
growth profile.
Key risks
Partnership with global pharma, earlier-than-expected product launches.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell list
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