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Cipla (CIPLA)
Pharmaceuticals
Restructuring steps positive. Cipla on Wednesday announced the closure of two
marketing divisions. We view this as a positive step taken to address the muted, belowindustry
growth reported in the domestic business. Cipla said the reorganization will
improve existing productivity though no cost savings will accrue from it. (1) Lack of
clarity on inhaler launches, (2) high capex and (3) poor asset turnover lead to Cipla
having below-peer ROE at 16-17% during FY2012-13E. Improving return ratios is
contingent upon rapid utilization of its facilities, likely post a potential supply deal with
a big pharma. Given the lack of visibility on these drivers, we maintain REDUCE despite
recent underperformance (16% in three months).
Cipla’s two marketing divisions, Protec and Omnicare, shut down—a positive step
Cipla has announced the closure of two marketing divisions— Protec and Omnicare. Cipla has
around 15 marketing divisions in India with nearly 7,000 MRs (medical representatives). These two
divisions generated sales of Rs5 bn (18% of FY2011 domestic sales) and contained products across
the branded generic and generic-generic segments, mainly consisting of old, established products
across antibiotic and other anti-infective therapy areas. According to Cipla, there will be no
downsizing in manpower or products through this initiative as the MRs from these two divisions
will be redeployed in other divisions while the products will be marketed by other divisions.
First visible step taken to address twin problems affecting domestic growth
Cipla has reported poor domestic sales growth for the past two years—12% in FY2010 and
FY2011. Among many reasons for this poor growth, this initiative addresses two key reasons—
(1) lower growth of the generic-generic segment (15-20% of domestic sales) which has grown at
single digit in FY2010-11, many of the products marketed by these divisions belong to this
segment, and (2) declining sales force productivity due to significant increase in sales force to
nearly 7,000. Cipla said products will be marketed by other divisions, putting more MRs behind
these products and leading to increase in productivity over time. Our analysis shows Cipla enjoys
MR productivity of Rs0.3 mn/MR/month, lower than Glaxo despite having higher chronic exposure.
What we need to see before turning positive?
Besides lower domestic market growth, two other concerns are (1) supernormal capex leading to
poor utilizations. In three years ending FY2009, Cipla has incurred a capex of Rs20 bn, in FY2011,
capex was Rs6.5-7 bn and Cipla expects to invest Rs6 bn in FY2012E. This has led to poor
utilizations and lower asset turnover, a key reason for the poor return ratios of 16-17%, and
(2) exports to regulated markets have been declining (37% of exports in FY2011 from 46% in
FY2009) with exports being driven by Africa, partly due to low margin ARV export (40%, up from
35%). Due to lack of clarity on timelines for inhaler combination approvals, we believe a supply
deal with a big pharma is critical to improve utilizations
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cipla (CIPLA)
Pharmaceuticals
Restructuring steps positive. Cipla on Wednesday announced the closure of two
marketing divisions. We view this as a positive step taken to address the muted, belowindustry
growth reported in the domestic business. Cipla said the reorganization will
improve existing productivity though no cost savings will accrue from it. (1) Lack of
clarity on inhaler launches, (2) high capex and (3) poor asset turnover lead to Cipla
having below-peer ROE at 16-17% during FY2012-13E. Improving return ratios is
contingent upon rapid utilization of its facilities, likely post a potential supply deal with
a big pharma. Given the lack of visibility on these drivers, we maintain REDUCE despite
recent underperformance (16% in three months).
Cipla’s two marketing divisions, Protec and Omnicare, shut down—a positive step
Cipla has announced the closure of two marketing divisions— Protec and Omnicare. Cipla has
around 15 marketing divisions in India with nearly 7,000 MRs (medical representatives). These two
divisions generated sales of Rs5 bn (18% of FY2011 domestic sales) and contained products across
the branded generic and generic-generic segments, mainly consisting of old, established products
across antibiotic and other anti-infective therapy areas. According to Cipla, there will be no
downsizing in manpower or products through this initiative as the MRs from these two divisions
will be redeployed in other divisions while the products will be marketed by other divisions.
First visible step taken to address twin problems affecting domestic growth
Cipla has reported poor domestic sales growth for the past two years—12% in FY2010 and
FY2011. Among many reasons for this poor growth, this initiative addresses two key reasons—
(1) lower growth of the generic-generic segment (15-20% of domestic sales) which has grown at
single digit in FY2010-11, many of the products marketed by these divisions belong to this
segment, and (2) declining sales force productivity due to significant increase in sales force to
nearly 7,000. Cipla said products will be marketed by other divisions, putting more MRs behind
these products and leading to increase in productivity over time. Our analysis shows Cipla enjoys
MR productivity of Rs0.3 mn/MR/month, lower than Glaxo despite having higher chronic exposure.
What we need to see before turning positive?
Besides lower domestic market growth, two other concerns are (1) supernormal capex leading to
poor utilizations. In three years ending FY2009, Cipla has incurred a capex of Rs20 bn, in FY2011,
capex was Rs6.5-7 bn and Cipla expects to invest Rs6 bn in FY2012E. This has led to poor
utilizations and lower asset turnover, a key reason for the poor return ratios of 16-17%, and
(2) exports to regulated markets have been declining (37% of exports in FY2011 from 46% in
FY2009) with exports being driven by Africa, partly due to low margin ARV export (40%, up from
35%). Due to lack of clarity on timelines for inhaler combination approvals, we believe a supply
deal with a big pharma is critical to improve utilizations
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