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We view Cipla as the best defensive Indian pharma stock with a strong presence in domestic
formulations. We expect growth to accelerate (19% EPS CAGR over FY10-13F) on operating
leverage gains, potential supply deals, the US patent cliff and inhaler opportunities in the EM/EU.
We initiate at Buy with a Rs371 TP.
Best defensive domestic pharma stock; geared to benefit from operating leverage
We view Cipla as the best defensive domestic pharma stock under our coverage given its
significant exposure to a stable domestic market and de-risked alliance model in developed
markets. Over the past 12 years, Cipla’s earnings growth and ROE have generally been in
excess of 15% and its EBITDA margin has been over 20%. While the company’s performance in
9MFY11 was muted, we expect a three-year earnings CAGR of 19% over FY10-13F driven by: 1)
operating leverage benefiting from capex of Rs18bn invested in building capacities in the past
three years; 2) the commercialisation of its Indore SEZ which management guides to contribute
about 10% to annual revenues; and 3) conversion of slowing technology licensing income into
robust export formulation sales.
Potential growth drivers: supply deals, the US patent cliff and inhalers in EM/EU
Cipla's large manufacturing capacities, chemistry expertise, large product basket and clean US
FDA track record make it an ideal supply partner for big pharma companies (similar to
Aurobindo’s supply contracts). Cipla could also benefit from the upcoming patent expiries in the
US (eg, supplying gZyprexa API to Teva).
Initiating coverage with a Buy rating and Rs371/share target price
We value Cipla at a PE of 24.6x FY12F (applying a 15% premium to our Indian pharma sector),
which yields a target price of Rs371. We believe the premium is justified given:
1) strong, 19% earnings growth over FY10-13F; 2) the company’s strong domestic market
presence; 3) potential upside from alliance opportunities with big pharma companies; 4) the lack
of US FDA overhang; and 5) the potential for M&A (given the succession issues). If Cipla were to
sell its domestic formulation unit at valuations akin to the Abbott-Piramal deal, it could unlock
Rs235/share (76% of market cap). We initiate with a Buy rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We view Cipla as the best defensive Indian pharma stock with a strong presence in domestic
formulations. We expect growth to accelerate (19% EPS CAGR over FY10-13F) on operating
leverage gains, potential supply deals, the US patent cliff and inhaler opportunities in the EM/EU.
We initiate at Buy with a Rs371 TP.
Best defensive domestic pharma stock; geared to benefit from operating leverage
We view Cipla as the best defensive domestic pharma stock under our coverage given its
significant exposure to a stable domestic market and de-risked alliance model in developed
markets. Over the past 12 years, Cipla’s earnings growth and ROE have generally been in
excess of 15% and its EBITDA margin has been over 20%. While the company’s performance in
9MFY11 was muted, we expect a three-year earnings CAGR of 19% over FY10-13F driven by: 1)
operating leverage benefiting from capex of Rs18bn invested in building capacities in the past
three years; 2) the commercialisation of its Indore SEZ which management guides to contribute
about 10% to annual revenues; and 3) conversion of slowing technology licensing income into
robust export formulation sales.
Potential growth drivers: supply deals, the US patent cliff and inhalers in EM/EU
Cipla's large manufacturing capacities, chemistry expertise, large product basket and clean US
FDA track record make it an ideal supply partner for big pharma companies (similar to
Aurobindo’s supply contracts). Cipla could also benefit from the upcoming patent expiries in the
US (eg, supplying gZyprexa API to Teva).
Initiating coverage with a Buy rating and Rs371/share target price
We value Cipla at a PE of 24.6x FY12F (applying a 15% premium to our Indian pharma sector),
which yields a target price of Rs371. We believe the premium is justified given:
1) strong, 19% earnings growth over FY10-13F; 2) the company’s strong domestic market
presence; 3) potential upside from alliance opportunities with big pharma companies; 4) the lack
of US FDA overhang; and 5) the potential for M&A (given the succession issues). If Cipla were to
sell its domestic formulation unit at valuations akin to the Abbott-Piramal deal, it could unlock
Rs235/share (76% of market cap). We initiate with a Buy rating.
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