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COMMENT
Cipla (CIPL.BO) Rs324.20
Equity Research
First Take: 3Q below expectations; margins compress; maintain Sell
News
Cipla reported 3QFY11 net income of Rs2.3bn which was 17%/18% below
GS/Bloomberg estimates. Revenue of Rs15.5bn was 3%/2% below
GS/Bloomberg estimates mainly due to sluggish domestic revenue growth
of 8% (yoy). EBIT margins compressed by 700 bp yoy to 16.3% on the back
of increased costs from the recently commissioned Indore SEZ plant.
Analysis
(1) Domestic business underperformance vs peers continues to play out as
expected: Cipla’s domestic business has lagged its peers over the past few
quarters and has clocked single-digit yoy growth in 3 out of the last 4
quarters, while its peers has been posting mid to high teen growth rates.
India accounts for close to 45% of Cipla’s overall revenues. With increasing
domestic focus by other Indian companies as well as global pharma, we
believe Cipla’s domestic leadership is under threat and forecast low teens
CAGR over the next 2-3 years.
(2) Capex benefits unlikely in near term; Margins to remain muted:
Management attributed the costs associated with the Indore SEZ as the
main reason for the drop in operating margins in 3Q. Management
estimates an operating cost of around Rs250mn per quarter for the Indore
plant. Currently product supply from the plant remains limited to
unregulated markets as the plant is yet to receive approvals from major
regulated markets. While the Indore plant is a positive for Cipla in the long
term, we continue to believe that it will be a drag on margins in the near to
medium term pending product supply and revenue from key regulated
markets like US and EU.
Implications
We maintain our Sell rating on Cipla as we believe that its sales growth will
lag peers due to reduced growth in the domestic market. We believe that
the current valuation is rich and risk-reward is skewed to the downside.
Our estimates and target price are under review pending further details
from management on the domestic franchise and 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 �� ��
COMMENT
Cipla (CIPL.BO) Rs324.20
Equity Research
First Take: 3Q below expectations; margins compress; maintain Sell
News
Cipla reported 3QFY11 net income of Rs2.3bn which was 17%/18% below
GS/Bloomberg estimates. Revenue of Rs15.5bn was 3%/2% below
GS/Bloomberg estimates mainly due to sluggish domestic revenue growth
of 8% (yoy). EBIT margins compressed by 700 bp yoy to 16.3% on the back
of increased costs from the recently commissioned Indore SEZ plant.
Analysis
(1) Domestic business underperformance vs peers continues to play out as
expected: Cipla’s domestic business has lagged its peers over the past few
quarters and has clocked single-digit yoy growth in 3 out of the last 4
quarters, while its peers has been posting mid to high teen growth rates.
India accounts for close to 45% of Cipla’s overall revenues. With increasing
domestic focus by other Indian companies as well as global pharma, we
believe Cipla’s domestic leadership is under threat and forecast low teens
CAGR over the next 2-3 years.
(2) Capex benefits unlikely in near term; Margins to remain muted:
Management attributed the costs associated with the Indore SEZ as the
main reason for the drop in operating margins in 3Q. Management
estimates an operating cost of around Rs250mn per quarter for the Indore
plant. Currently product supply from the plant remains limited to
unregulated markets as the plant is yet to receive approvals from major
regulated markets. While the Indore plant is a positive for Cipla in the long
term, we continue to believe that it will be a drag on margins in the near to
medium term pending product supply and revenue from key regulated
markets like US and EU.
Implications
We maintain our Sell rating on Cipla as we believe that its sales growth will
lag peers due to reduced growth in the domestic market. We believe that
the current valuation is rich and risk-reward is skewed to the downside.
Our estimates and target price are under review pending further details
from management on the domestic franchise and product launches.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
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