Cipla - Company Update - Margin impacted due to acquisition: Centrum

Rating: Buy; Target Price: Rs540; CMP: Rs382; Upside:41.5%



Margin impacted due to acquisition

We maintain Buy rating for Cipla with a price target of Rs540 from
Rs585 due to the fall in margins on consolidation of Medpro business.
On a consolidated basis, Cipla reported 13%YoY growth in revenues,
920bps decline in EBIDTA margin and 27% drop in net profit. Cipla has
established front end capability in the US and also enhanced its R & D
spend. We have revised our FY14 and FY15 EPS estimates downwards by 5%
and 13% respectively. Our target price is based on 22x Sept’15 EPS of
Rs24.5. Key risks to our estimates are slowdown of the domestic pharma
market and lower demand for the company’s products.

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$ Good domestic growth despite slowdown: Cipla has reported 12%YoY
growth in domestic revenues to Rs10.40bn from Rs9.32bn despite
domestic slowdown. This was attributed to higher growth in
anti-asthma, urology and COPD segments. Cipla’s exports grew by 15%YoY
to Rs14.23bn from Rs12.35bn despite a higher base due to the supply of
escitalopram in Q2FY13. The export growth was in ARV, anti-allergic
and anti-malarial segments.

$ Margin declines due to acquisition: Cipla’s EBIDTA margin declined
by 920bpsYoY due to overall increase in costs. Its material cost
increased by 380bps to 37.7% from 33.9% due to the change in product
mix with higher proportion of ARV and lower contribution from
escitalopram. Personnel cost was higher by 260bps to 14.4% from 11.8%
due to annual increments and inclusion of Medpro staff. Other expenses
grew by 280bps to 25.4% from 22.6% due to the rise in R & D expenses,
setting up of US front end, increase in sales promotion expenses and
professional charges.

$ Medpro to drive future growth: Cipla acquired 100% stake in Cipla
Medpro, S. Africa for Rs27.07bn.  Currently, 90% of Medpro’s
requirements are met by Cipla. Medpro has EBIDTA margin of 18-19% and
pulls down the overall margins. With the acquisition of Medpro, Cipla
has plans to expand its African business and enter into other African
companies. We expect Medpro to contribute significantly from FY15 due
to the launch of Cipla’s products in the African market.

$ Major brands to drive growth: We expect Cipla to report consistent
performance due to strong growth of its major brands in anti-asthma,
ARV and anti-cancer segments. We have revised our EPS estimates for
FY14 and FY15 downwards by 5% and 13% respectively. We have valued the
stock at 22xSept’15 EPS of Rs24.5 and arrived at a target price of
Rs540 with a 41.5% upside from CMP. Key risks to our estimates would
be slowdown in the domestic market and lower demand for the company’s
products.



Thanks & Regards,

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