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UBS Investment Research
Cipla Ltd.
U pgrade to Buy on price performance
Event: weakness in domestic business priced in, margins could pick up
We believe near-term weakness in earnings due to weak growth in the domestic
market is priced in. Given 56% of company revenues is derived from exports, we
expect margins and revenues to benefit from the sharp rupee depreciation. The
stock is the worst performing stock in our Pharma coverage, having declined 14%
in the past three months. The stock has underperformed the BSE Healthcare Index
9% over the past one year.
Impact: raise FY12/13E EPS by 5.3%/5.2%
We move from Rs45/USD to Rs47/USD for FY12E and FY13E given the sharp
depreciation of the rupee vs the USD in the past few days. We expect margins to
improve as most of the exports for the company are dollar-denominated.
Consequently, we raise our FY12/13 EPS estimates.
Action: upgrade from Sell to Buy, upside to earnings remains
We expect a robust EPS CAGR of 16% over FY11-13. Management at the recent
AGM indicated potentially meaningful revenue opportunities in the US in the near
term. Management also indicated that it expects a few more inhaler approvals in
the EU by FY13 including combination inhalers. These opportunities, if they
materialise, would provide upside to our current estimates.
Valuation: trading at 17x FY13E PE, Raise PT to Rs340 (from Rs315)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a WACC of 11%).
At our price target, the stock would trade at 20.5x FY13E earnings. The stock is
currently trading close to the bottom end of its historical trading range.
Upgrade to Buy
We upgrade Cipla to a Buy from Sell, given the sharp decline in valuations.
The stock at 17x is trading at the lower end of its trading range. We believe
the slower growth in the domestic business is now priced in.
Given, 56% of company revenues is derived from exports, we expect
margins and revenues to benefit from the sharp rupee depreciation. We now
forecast an EPS CAGR of 16% over FY11-13.
We believe potential product launches in the US through its partners could
provide upside to our existing estimates. Management also expects more
approvals for inhalers in the EU over the next two years.
EU inhalers could be a limited competition opportunity
In the EU, the company has received approval for four inhalers out of the 11
filed. Management expects some other products, including combination
inhaler products, to be approved within the next two years. Cipla is the first
generic company in the UK to get approval for Salmetrol inhaler for
Asthma/COPD.
The opportunity at innovator prices in the EU is ~US$3bn for these products.
The timelines for regulatory approval in the EU remain very long, taking up
to five to six years. The company could enjoy substantial upside if only a
couple of companies get approval for these products.
Valuation
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool with a WACC of
11%. At our price target of Rs340, Cipla would trade at 20.5x FY12E earnings
vs. historical mean of 22x 1-year forward PE.
Cipla Ltd.
In 1935, KA Hamied set up The Chemical, Industrial & Pharmaceutical
Laboratories, now known as Cipla. With a 5.3% market share, it was the largest
domestic pharmaceutical company in India at the end of FY10. The domestic
market accounted for close to 45% of FY10 revenue, while exports accounted
for the rest. In FY10, Cipla's key export markets were Africa at 34%, Americas
25%, Europe 17%, the Middle East 9%, and Australasia for the remainder. The
Hamied family owns 39% of Cipla.
Statement of Risk
We believe general risks include FDA approval, timing of approvals
competition from rival drug therapies, litigation (including the appeal process),
accounting/disclosure, and product pricing from generic competition. Pricing
pressure in the US generic market continues to remain severe.
Cipla's export business remains very difficult to forecast in terms of timing of
revenues as lumpiness of customer orders can make quarterly sales volatile.
Cipla is setting up new plants for its export business. Delay in
construction/approvals of facilities can impact revenues and profits. Export
growth depends on product approvals as well as Cipla’s partners’ focus and
success in litigation on these products. Sharp rise in rupee against other major
currencies could result in further cost pressure and lower profitability.
Technology fees remain extremely volatile and have limited visibility, adding to
volatility of quarterly profits for Cipla.
Cipla is in litigation with the Indian government over certain drugs, on whether
these drugs fall within the purview of government price control. Incase, the
company loses litigation against the government, the company faces significant
liability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Cipla Ltd.
U pgrade to Buy on price performance
Event: weakness in domestic business priced in, margins could pick up
We believe near-term weakness in earnings due to weak growth in the domestic
market is priced in. Given 56% of company revenues is derived from exports, we
expect margins and revenues to benefit from the sharp rupee depreciation. The
stock is the worst performing stock in our Pharma coverage, having declined 14%
in the past three months. The stock has underperformed the BSE Healthcare Index
9% over the past one year.
Impact: raise FY12/13E EPS by 5.3%/5.2%
We move from Rs45/USD to Rs47/USD for FY12E and FY13E given the sharp
depreciation of the rupee vs the USD in the past few days. We expect margins to
improve as most of the exports for the company are dollar-denominated.
Consequently, we raise our FY12/13 EPS estimates.
Action: upgrade from Sell to Buy, upside to earnings remains
We expect a robust EPS CAGR of 16% over FY11-13. Management at the recent
AGM indicated potentially meaningful revenue opportunities in the US in the near
term. Management also indicated that it expects a few more inhaler approvals in
the EU by FY13 including combination inhalers. These opportunities, if they
materialise, would provide upside to our current estimates.
Valuation: trading at 17x FY13E PE, Raise PT to Rs340 (from Rs315)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a WACC of 11%).
At our price target, the stock would trade at 20.5x FY13E earnings. The stock is
currently trading close to the bottom end of its historical trading range.
Upgrade to Buy
We upgrade Cipla to a Buy from Sell, given the sharp decline in valuations.
The stock at 17x is trading at the lower end of its trading range. We believe
the slower growth in the domestic business is now priced in.
Given, 56% of company revenues is derived from exports, we expect
margins and revenues to benefit from the sharp rupee depreciation. We now
forecast an EPS CAGR of 16% over FY11-13.
We believe potential product launches in the US through its partners could
provide upside to our existing estimates. Management also expects more
approvals for inhalers in the EU over the next two years.
EU inhalers could be a limited competition opportunity
In the EU, the company has received approval for four inhalers out of the 11
filed. Management expects some other products, including combination
inhaler products, to be approved within the next two years. Cipla is the first
generic company in the UK to get approval for Salmetrol inhaler for
Asthma/COPD.
The opportunity at innovator prices in the EU is ~US$3bn for these products.
The timelines for regulatory approval in the EU remain very long, taking up
to five to six years. The company could enjoy substantial upside if only a
couple of companies get approval for these products.
Valuation
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool with a WACC of
11%. At our price target of Rs340, Cipla would trade at 20.5x FY12E earnings
vs. historical mean of 22x 1-year forward PE.
Cipla Ltd.
In 1935, KA Hamied set up The Chemical, Industrial & Pharmaceutical
Laboratories, now known as Cipla. With a 5.3% market share, it was the largest
domestic pharmaceutical company in India at the end of FY10. The domestic
market accounted for close to 45% of FY10 revenue, while exports accounted
for the rest. In FY10, Cipla's key export markets were Africa at 34%, Americas
25%, Europe 17%, the Middle East 9%, and Australasia for the remainder. The
Hamied family owns 39% of Cipla.
Statement of Risk
We believe general risks include FDA approval, timing of approvals
competition from rival drug therapies, litigation (including the appeal process),
accounting/disclosure, and product pricing from generic competition. Pricing
pressure in the US generic market continues to remain severe.
Cipla's export business remains very difficult to forecast in terms of timing of
revenues as lumpiness of customer orders can make quarterly sales volatile.
Cipla is setting up new plants for its export business. Delay in
construction/approvals of facilities can impact revenues and profits. Export
growth depends on product approvals as well as Cipla’s partners’ focus and
success in litigation on these products. Sharp rise in rupee against other major
currencies could result in further cost pressure and lower profitability.
Technology fees remain extremely volatile and have limited visibility, adding to
volatility of quarterly profits for Cipla.
Cipla is in litigation with the Indian government over certain drugs, on whether
these drugs fall within the purview of government price control. Incase, the
company loses litigation against the government, the company faces significant
liability.
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