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Cipla --------------------------------------------------------------------------------------Maintain NEUTRAL
Guidance is conservative or weak? renewed focus on Indian market is positive
● 4Q11 was a weak quarter except for domestic growth returning to
industry average. FY12 guidance for both sales growth and
margin is uninspiring.
● Guidance of top-line growth of 10-12% with domestic growth of
14-15% implies exports would grow at just 11%. This further
indicates that Indore SEZ (expected to contribute 10% of top-line)
includes sales that shifted from other facilities. Margin guidance of
18-20% (vs 18% in 4Q11) assumes Indore SEZ turning profitable
and domestic and other export margins remaining stable. Indore
SEZ breaking even can add 120 bp to margins.
● We liked Cipla’s renewed focus on the domestic market with entry
into newer chronic therapies (oncology, neuro and psychiatry) and
field force expansion to increase geographic reach. This would
ensure Cipla grows in line with the industry average.
● We maintain NEUTRAL and would turn more constructive when
export growth exceeds 12% and margin is over 21%. FY12 EPS
reduces by 4% as margin guidance is weaker than expected.
Conservative guidance? Indore SEZ includes shifted sales
We try to piece together the guidance at the top line and the division
level. Cipla expects top line growth of 10-12% while domestic division
is expected to grow at industry average (14-15%). At the top end of
guidance, this implies exports will only grow at 11%. This raises doubt
as management has further guided that Indore SEZ would account for
10% of total sales in FY12. This is only possible if all FY12 sales from
Indore SEZ are not incremental and include a significant portion that
has shifted from other facilities to Indore SEZ.
Margin guidance is uninspiring
Cipla guided for EBITDA margin of 18-20% in FY12 when 4Q11
margins were low at 18%. Management expects Indore SEZ to breakeven
in 1Q12. It had total loss of Rs300 mn in 4Q11 and we estimate
loss of Rs200 mn at EBITDA. Indore SEZ breaking even adds 120 bp
to the margin and therefore margin improvement in remaining
business is not expected to be significant. This is also explained by
management strategy of expanding growth in the domestic market
primarily through reach, which should come at a lower margin.
Renewed focus on domestic market is positive
Domestic market growth rebounded in 4Q11 to 15% with Cipla
focussing on expanding its reach and entering newer chronic
therapies such as oncology, neuro and psychiatry. The field staff has
expanded from 5,550 to 6,000 and would further increase as Cipla
takes on field staff of the franchises on its rolls.
Weak 4Q11: margin weakness is more than product mix
EBITDA missed our estimate by 14% despite sales beating by 8%.
The reason was higher proportion of API exports, which include lowmargin
ARVs and anti-AIDS drugs. However, the miss in margin was
higher than just product mix and was due to lower margin in the
domestic division. This could be explained by the increase in staffing.
Figure 1: 4Q11 standalone results versus CS estimates
Rs Mn 4Q11A 4Q11E Diff (%) 4Q10A Y/Y %
Net sales 16,485 15,305 8% 13,611 21%
Domestic sales 6,522 6,427 1% 5,688 15%
Formulation exports 7,428 7,020 6% 6,139 21%
API exports 2,322 1,634 42% 1,463 59%
Total expenditure 13,671 12,035 14% 10,967 25%
Material cost 7,998 6,932 15% 6,108 31%
Personnel cost 1,308 1,378 -5% 999 31%
Other expenses 4,365 3,724 17% 3,860 13%
EBITDA 2,814 3,271 -14% 2,644 6%
EBITDA margin 17.1% 21.4% -4% 19.4% -2.36%
Depreciation 697 653 7% 495 41%
Technology income 207 300 -31% 136 53%
Other income 204 171 19% 451 -55%
Income taxes 370 555 -33% 726 -49%
Net income 2,140 2,530 -15% 2,755 -22%
EPS (Rs) basic 2.7 3.2 -15% 3.4 -22%
Source: Company data, Credit Suisse estimates
Key takeaways from conference call
● Mr. Hamied categorically mentioned that he is not interested in
selling stake in Cipla.
● DEPB benefit was Rs600 mn last year but the entire benefit will
not expire as the expiration applies to non-SEZ and non-EOU.
● US FDA has not yet inspected Indore SEZ.
● Seroflo launch in Russia was successful but its launch in South
Africa is yet to contribute meaningfully.
● Consolidated PAT for Cipla is higher than standalone by 4-5%.
Maintain NEUTRAL; target price Rs300/share
We reduce FY12 estimates by 4% as the margin guidance is weakerthan-
expected. We roll forward our target price to the next four
quarters and it remains unchanged. We would turn more constructive
on the stock when export growth is over 12% and the operating
margin exceeds 21%. Till then, we maintain NEUTRAL. The
opportunity from generic combination inhalers in Europe is significant
but upside for Cipla would be realised only in FY14, and therefore, is
too early to value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cipla --------------------------------------------------------------------------------------Maintain NEUTRAL
Guidance is conservative or weak? renewed focus on Indian market is positive
● 4Q11 was a weak quarter except for domestic growth returning to
industry average. FY12 guidance for both sales growth and
margin is uninspiring.
● Guidance of top-line growth of 10-12% with domestic growth of
14-15% implies exports would grow at just 11%. This further
indicates that Indore SEZ (expected to contribute 10% of top-line)
includes sales that shifted from other facilities. Margin guidance of
18-20% (vs 18% in 4Q11) assumes Indore SEZ turning profitable
and domestic and other export margins remaining stable. Indore
SEZ breaking even can add 120 bp to margins.
● We liked Cipla’s renewed focus on the domestic market with entry
into newer chronic therapies (oncology, neuro and psychiatry) and
field force expansion to increase geographic reach. This would
ensure Cipla grows in line with the industry average.
● We maintain NEUTRAL and would turn more constructive when
export growth exceeds 12% and margin is over 21%. FY12 EPS
reduces by 4% as margin guidance is weaker than expected.
Conservative guidance? Indore SEZ includes shifted sales
We try to piece together the guidance at the top line and the division
level. Cipla expects top line growth of 10-12% while domestic division
is expected to grow at industry average (14-15%). At the top end of
guidance, this implies exports will only grow at 11%. This raises doubt
as management has further guided that Indore SEZ would account for
10% of total sales in FY12. This is only possible if all FY12 sales from
Indore SEZ are not incremental and include a significant portion that
has shifted from other facilities to Indore SEZ.
Margin guidance is uninspiring
Cipla guided for EBITDA margin of 18-20% in FY12 when 4Q11
margins were low at 18%. Management expects Indore SEZ to breakeven
in 1Q12. It had total loss of Rs300 mn in 4Q11 and we estimate
loss of Rs200 mn at EBITDA. Indore SEZ breaking even adds 120 bp
to the margin and therefore margin improvement in remaining
business is not expected to be significant. This is also explained by
management strategy of expanding growth in the domestic market
primarily through reach, which should come at a lower margin.
Renewed focus on domestic market is positive
Domestic market growth rebounded in 4Q11 to 15% with Cipla
focussing on expanding its reach and entering newer chronic
therapies such as oncology, neuro and psychiatry. The field staff has
expanded from 5,550 to 6,000 and would further increase as Cipla
takes on field staff of the franchises on its rolls.
Weak 4Q11: margin weakness is more than product mix
EBITDA missed our estimate by 14% despite sales beating by 8%.
The reason was higher proportion of API exports, which include lowmargin
ARVs and anti-AIDS drugs. However, the miss in margin was
higher than just product mix and was due to lower margin in the
domestic division. This could be explained by the increase in staffing.
Figure 1: 4Q11 standalone results versus CS estimates
Rs Mn 4Q11A 4Q11E Diff (%) 4Q10A Y/Y %
Net sales 16,485 15,305 8% 13,611 21%
Domestic sales 6,522 6,427 1% 5,688 15%
Formulation exports 7,428 7,020 6% 6,139 21%
API exports 2,322 1,634 42% 1,463 59%
Total expenditure 13,671 12,035 14% 10,967 25%
Material cost 7,998 6,932 15% 6,108 31%
Personnel cost 1,308 1,378 -5% 999 31%
Other expenses 4,365 3,724 17% 3,860 13%
EBITDA 2,814 3,271 -14% 2,644 6%
EBITDA margin 17.1% 21.4% -4% 19.4% -2.36%
Depreciation 697 653 7% 495 41%
Technology income 207 300 -31% 136 53%
Other income 204 171 19% 451 -55%
Income taxes 370 555 -33% 726 -49%
Net income 2,140 2,530 -15% 2,755 -22%
EPS (Rs) basic 2.7 3.2 -15% 3.4 -22%
Source: Company data, Credit Suisse estimates
Key takeaways from conference call
● Mr. Hamied categorically mentioned that he is not interested in
selling stake in Cipla.
● DEPB benefit was Rs600 mn last year but the entire benefit will
not expire as the expiration applies to non-SEZ and non-EOU.
● US FDA has not yet inspected Indore SEZ.
● Seroflo launch in Russia was successful but its launch in South
Africa is yet to contribute meaningfully.
● Consolidated PAT for Cipla is higher than standalone by 4-5%.
Maintain NEUTRAL; target price Rs300/share
We reduce FY12 estimates by 4% as the margin guidance is weakerthan-
expected. We roll forward our target price to the next four
quarters and it remains unchanged. We would turn more constructive
on the stock when export growth is over 12% and the operating
margin exceeds 21%. Till then, we maintain NEUTRAL. The
opportunity from generic combination inhalers in Europe is significant
but upside for Cipla would be realised only in FY14, and therefore, is
too early to value.
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