Cipla-Maintain Sell on weak earnings outlook: UBS

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UBS Investment Research
Cipla Ltd.
Maintain Sell on weak earnings outlook

􀂄 Weak earnings growth outlook
We believe Cipla’s earnings growth momentum is likely to remain weak and
forecast a 12.8% CAGR over FY10-13. We think the stock is fully priced at 21x
FY12E earnings. Management maintains its guidance for 10% revenue growth and
similar operating margins in FY11.


􀂄 India franchise to remain under pressure
Cipla’s chronic respiratory franchise accounts for 25% of its domestic sales, but we
expect increasing competition to slow growth. We therefore forecast 12%/14%
YoY domestic sales growth in FY11/12.
􀂄 No exposure to potential FTF launches in the US
We believe Cipla’s partnership model has not been successful in the US generics
market. Consequently, we do not expect a significant earnings surprise from
product launches in the US. We believe the inhaler opportunity in Europe is
already reflected in the share price.
􀂄 Valuation: maintain Sell rating and price target of Rs340.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11%.