Cipla-- Margin pressures continue; Sell: Anand Rathi

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Cipla
Margin pressures continue; maintain Sell
 Q2FY11 results. Cipla reported modest revenue growth of 12%
yoy led by strong growth in domestic formulations. However,
adjusted net profit dropped 2.4% yoy due to a 320-bp fall in
EBITDA margin and a high depreciation charge on the Indore
SEZ plant commercialisation.


 Revenue growth revives. After four quarters of single-digit
growth, Cipla reported 12% revenue growth. With the base effect
kicking in, domestic formulations grew strong at 19.8% yoy mainly
due to the heavy monsoons in Q2FY11; export formulations grew
14.1% yoy led by commercialisation of the new plant at the Indore
SEZ.

 Margin pressures persist. Despite the revived revenue growth,
EBITDA margin continued under pressure and slid 320bp yoy to
22.7%. The decline stemmed chiefly from the Indian currency
appreciation and higher operating expenses at Indore SEZ plant.

 Outlook. We expect the growth to continue to be in the range of
10-12% yoy for the next few quarters as a pick-up in revenue from
the Indore SEZ would come about gradually. We believe that
margins would continue to be ~23-24%.

 Valuation. At CMP, Cipla trades at a stretched valuation of 21.5x
FY12e earnings. We retain our target price of `308 and re-iterate
Sell. Upside risk: any large products-supply deal with an MNC.