Cipla - Product rationalisation hampers growth…:: ICICI Securities, PDF link

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Product rationalisation hampers growth…
• Revenues grew 10.1% YoY to | 2767.3 crore, below I-direct estimate
of | 2944.6 crore on account of just 0.3% growth in export
formulations to | 1243 crore (I-direct estimate: | 1462 crore) and
34% de-growth in export APIs to | 136 crore (I-direct estimate:
| 214.2 crore)
• EBITDA margins declined ~227.5 bps to 20.2% compared to I-direct
estimate of 19.5%. EBITDA in absolute terms de-grew 1% YoY to
| 558.4 crore vs. I-direct estimate of | 574.2 crore
• Net profit witnessed de-growth of 16.6% YoY to | 298.7 crore, lower
than I-direct estimate of | 320 crore
Products launches, front-end shift key for formulation exports growth
Formulation exports constitute 49% of total revenues. To improve the
quality of exports, Cipla has undertaken scores of measures of late.
Partnership deals and participation in global tenders were the growth
drivers in the past for exports. The focus has now shifted to the front-end
model, especially for the US and a gradual shift from loss making HIV and
other tenders to more lucrative respiratory and other opportunities in the
US and EU. Recent acquisitions in Africa and other geographies is
testimony to this transformation. We expect export sales to grow at a
CAGR of 20.8% to | 8727 crore during FY14-17E. Key drivers will be 1)
launch of combination inhalers in EU markets, 2) incremental product
launches by its partners and increase in own product filings in the US, 3)
reduced focus on the ARV tender business and at the same time
increased focus on PEPFAR like tenders and 4) Medpro consolidation.
Indian formulations growth backed by continuous new launches
With ~5% market share, Cipla is the second largest player in the
domestic formulations market. The acute-chronic ratio for the company
stands at 59:41. Domestic formulations comprise 40% of total revenues. It
commands ~20% market share in the respiratory segment. We expect
domestic formulations to grow at a CAGR of 16.7% during FY14-17E to
| 6495 crore driven by improved productivity of the newly inducted field
force and incremental product launches.
Margin issue addressed; next step product rationalisation
In its quest to transform itself from back end to front end (albeit late) the
company has initiated some structural changes at the cost of margins
such as 1) higher R&D cost on the back of incremental product filings
across geographies, 3) higher staff cost on the back of hiring at the global
level and 4) higher front-end and SG&A expenses. With margins slowly
coming back to the normal 20% level, the company has now opted for
product rationalisation exercise to focus more on high-end products.
Margin focus through product rationalisation; maintain HOLD
The Q2 numbers reflect the management’s intention to focus on high
value products and dump the commoditised ones. The margin scenario
seems to be slowly but surely improving. The management remains
confident of achieving mid-teen growth target for FY15 but with the first
half growth labouring to 9%, this target seems demanding. Though it is
pretty early to confirm a full circle of successful transformation, it seems
that things may have started working, at least on the margins front.
However, that may take some toll on the topline growth. Assuming a
three to five year gestation period from FY11, the year in which the whole
exercise was initiated, we expect recovery process to continue slowly but
surely. We have valued the stock at | 585 i.e. 20x FY17E EPS of | 29.2


LINK
http://content.icicidirect.com/mailimages/IDirect_Cipla_Q2FY15.pdf