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Domestic growth can surprise positively
Cipla has broadly underperformed the domestic market (13% CAGR versus
industry growth of 14-15%) over the past three years due to decline in its mature
(~20% of domestic) and generic portfolio (20% of total domestic sales declined by
10-15%), while its focus portfolio was growing ahead of the market (19-20%
growth). We believe the company’s domestic market growth can surprise positively
due to higher traction from tier II-IV towns, where it has a strong foothold (as per
our survey), while its strategy to address decline in mature and generic-generic
portfolio can give higher upside from a low base.
Emerging markets lead exports; regulated markets to gain traction
Emerging markets so far have been the key growth drivers for Cipla’s exports; the
contribution has jumped from 46% in FY07 to 54% in FY10 (24% CAGR), driven
by Africa, Middle East, and Australia. We expect regulated markets’ contribution to
soar with ramp-up in supply contracts as the company will benefit from the patent
expiry in US and EU where it is one of the early filers of DMF/ANDA, through
partners, for some blockbuster drugs. We estimate 17% CAGR for ROW markets.
Combination inhalers in EU: Key driver of future growth
After initial regulatory hurdles in EU, the company has launched single ingredient
inhalers in a few EU markets. Cipla has also launched the Seroflo combination
inhaler (gAdvair) in Russia and South Africa, which instills confidence in its ability
to monetise opportunities in regulated (initially in EU) and ROW markets going
forward. The combined addressable market (single and combination products) in
ROW/EU is USD 2.3 bn/USD 6 bn. We expect Cipla to get early approvals for ROW
markets, while launch of combination inhalers in EU will be a long term driver.
Outlook and valuations: Positive growth catalyst; upgrade to ‘HOLD’
We expect Cipla’s revenue (ex-tech income) to post 15% CAGR over FY10-13E,
driven by growth in India and formulation exports. We believe, with higher growth
in the domestic formulation business and lower base effect of licensing income,
EBIDTA margin is likely to expand 160 bps over FY10-13E. We value the company
at 19x FY13E, in line with the industry and set a 12 months price target of INR 350
per share. Hence, we upgrade our recommendation on the stock from ‘REDUCE’ to
‘HOLD’. We rate the stock ‘Sector Performer’ on relative returns basis.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Domestic growth can surprise positively
Cipla has broadly underperformed the domestic market (13% CAGR versus
industry growth of 14-15%) over the past three years due to decline in its mature
(~20% of domestic) and generic portfolio (20% of total domestic sales declined by
10-15%), while its focus portfolio was growing ahead of the market (19-20%
growth). We believe the company’s domestic market growth can surprise positively
due to higher traction from tier II-IV towns, where it has a strong foothold (as per
our survey), while its strategy to address decline in mature and generic-generic
portfolio can give higher upside from a low base.
Emerging markets lead exports; regulated markets to gain traction
Emerging markets so far have been the key growth drivers for Cipla’s exports; the
contribution has jumped from 46% in FY07 to 54% in FY10 (24% CAGR), driven
by Africa, Middle East, and Australia. We expect regulated markets’ contribution to
soar with ramp-up in supply contracts as the company will benefit from the patent
expiry in US and EU where it is one of the early filers of DMF/ANDA, through
partners, for some blockbuster drugs. We estimate 17% CAGR for ROW markets.
Combination inhalers in EU: Key driver of future growth
After initial regulatory hurdles in EU, the company has launched single ingredient
inhalers in a few EU markets. Cipla has also launched the Seroflo combination
inhaler (gAdvair) in Russia and South Africa, which instills confidence in its ability
to monetise opportunities in regulated (initially in EU) and ROW markets going
forward. The combined addressable market (single and combination products) in
ROW/EU is USD 2.3 bn/USD 6 bn. We expect Cipla to get early approvals for ROW
markets, while launch of combination inhalers in EU will be a long term driver.
Outlook and valuations: Positive growth catalyst; upgrade to ‘HOLD’
We expect Cipla’s revenue (ex-tech income) to post 15% CAGR over FY10-13E,
driven by growth in India and formulation exports. We believe, with higher growth
in the domestic formulation business and lower base effect of licensing income,
EBIDTA margin is likely to expand 160 bps over FY10-13E. We value the company
at 19x FY13E, in line with the industry and set a 12 months price target of INR 350
per share. Hence, we upgrade our recommendation on the stock from ‘REDUCE’ to
‘HOLD’. We rate the stock ‘Sector Performer’ on relative returns basis.
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