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While 4Q revenue growth was robust, margins continued to be under pressure due to impact of
Indore SEZ and an unfavorable product mix. However, we foresee margin expansion ahead as
Indore SEZ achieves break-even and benefits of operating leverage kicks in. Maintain Buy.
Strong revenue growth across businesses but margins disappoint
Cipla reported 4Q11 revenues of Rs16.4bn (+23% yoy, 8% qoq), 10% ahead of our estimate
of Rs14.9bn. Revenue growth was strong across businesses - Domestic formulation business
(46% of FY11 revenues) grew 15% yoy; Export formulations (43%) grew 21% yoy; and Export
API business (11%) grew 59% yoy.
However, an unfavourable product mix (higher contribution from the low-margin ARV
business) and negative contribution from the Indore SEZ pulled down the EBITDA margin to
16.4% (117bps lower yoy, 211bps lower qoq). Excluding the contribution of the Indore SEZ
facility, EBITDA margin was 19%. The company reported EBITDA of Rs2.7bn (15% yoy, -4%
qoq).
Tax rate came in at 14.7% vs. 21.2% in 4Q10 and our estimate of 15.5%. Cipla reported core
PAT of Rs2.1bn (7% yoy, -8% qoq). Factoring the Rs950m exceptional income received on
sale of 'i-pill' brand in 4Q10, reported PAT declined 22% yoy.
Margin expansion ahead
While management has guided to a conservative FY12 revenue growth of 10-12%, it expects
earnings growth to be significantly stronger due to expectations of an uptick in margins. The
key positive takeaway from the results was that the Indore SEZ is expected to break-even
from this quarter as most regulatory approvals are now in place. Management has stated that
this facility had a net negative EBITDA contribution of Rs1.1bn in FY11 (Rs300m in 4QFY11).
Management therefore guides to operating margin of 18-20% in FY12 compared to 17.4% in
2HFY11 but which is marginally lower than our 21.2% forecast.
Other conference call highlights
Indore SEZ: During 4Q, the Indore SEZ contributed Rs600m to the topline but Rs900m to
expenses. Management reiterated that it expects this facility to represent 10% of its FY12
revenues.
Optimistic on domestic formulations: Management is optimistic on the domestic formulation
market and is targeting to increase penetration to drive growth. It had added about 500
representatives to its field force in FY11 taking it to 6,000 and plans to expand it further in
FY12.
Seroflo launched in Russia: Seroflo (generic Advair/Seretide) has been launched in Russia
and the response in the first month was encouraging. However, the product is still to pick up
significantly in South Africa where it was launched in the previous quarter. We highlight that
Advair/Seretide netted worldwide revenues of US$7.9bn and US$1.4bn in non-US & EU
markets in CY10.
Exports break-up: ARVs represents 30% of its export formulation business while its
respiratory products represent about 10-12%. About 40-50% of its ARV business is through
the low margin tender business.
We retain our Buy rating on Cipla with a TP of Rs371
Our TP of Rs371 is derived by valuing Cipla at a 15% premium to peers (ie, 24.6x FY12F
PE). We believe the premium is justified given: 1) strong, 19% earnings growth over FY10-
13F driven by operating leverage benefits; 2) the company's strong domestic market
presence; 3) potential upside from MNC supply deals; 4) the lack of US FDA overhang; and
5) the potential for M&A (given the succession issues).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
While 4Q revenue growth was robust, margins continued to be under pressure due to impact of
Indore SEZ and an unfavorable product mix. However, we foresee margin expansion ahead as
Indore SEZ achieves break-even and benefits of operating leverage kicks in. Maintain Buy.
Strong revenue growth across businesses but margins disappoint
Cipla reported 4Q11 revenues of Rs16.4bn (+23% yoy, 8% qoq), 10% ahead of our estimate
of Rs14.9bn. Revenue growth was strong across businesses - Domestic formulation business
(46% of FY11 revenues) grew 15% yoy; Export formulations (43%) grew 21% yoy; and Export
API business (11%) grew 59% yoy.
However, an unfavourable product mix (higher contribution from the low-margin ARV
business) and negative contribution from the Indore SEZ pulled down the EBITDA margin to
16.4% (117bps lower yoy, 211bps lower qoq). Excluding the contribution of the Indore SEZ
facility, EBITDA margin was 19%. The company reported EBITDA of Rs2.7bn (15% yoy, -4%
qoq).
Tax rate came in at 14.7% vs. 21.2% in 4Q10 and our estimate of 15.5%. Cipla reported core
PAT of Rs2.1bn (7% yoy, -8% qoq). Factoring the Rs950m exceptional income received on
sale of 'i-pill' brand in 4Q10, reported PAT declined 22% yoy.
Margin expansion ahead
While management has guided to a conservative FY12 revenue growth of 10-12%, it expects
earnings growth to be significantly stronger due to expectations of an uptick in margins. The
key positive takeaway from the results was that the Indore SEZ is expected to break-even
from this quarter as most regulatory approvals are now in place. Management has stated that
this facility had a net negative EBITDA contribution of Rs1.1bn in FY11 (Rs300m in 4QFY11).
Management therefore guides to operating margin of 18-20% in FY12 compared to 17.4% in
2HFY11 but which is marginally lower than our 21.2% forecast.
Other conference call highlights
Indore SEZ: During 4Q, the Indore SEZ contributed Rs600m to the topline but Rs900m to
expenses. Management reiterated that it expects this facility to represent 10% of its FY12
revenues.
Optimistic on domestic formulations: Management is optimistic on the domestic formulation
market and is targeting to increase penetration to drive growth. It had added about 500
representatives to its field force in FY11 taking it to 6,000 and plans to expand it further in
FY12.
Seroflo launched in Russia: Seroflo (generic Advair/Seretide) has been launched in Russia
and the response in the first month was encouraging. However, the product is still to pick up
significantly in South Africa where it was launched in the previous quarter. We highlight that
Advair/Seretide netted worldwide revenues of US$7.9bn and US$1.4bn in non-US & EU
markets in CY10.
Exports break-up: ARVs represents 30% of its export formulation business while its
respiratory products represent about 10-12%. About 40-50% of its ARV business is through
the low margin tender business.
We retain our Buy rating on Cipla with a TP of Rs371
Our TP of Rs371 is derived by valuing Cipla at a 15% premium to peers (ie, 24.6x FY12F
PE). We believe the premium is justified given: 1) strong, 19% earnings growth over FY10-
13F driven by operating leverage benefits; 2) the company's strong domestic market
presence; 3) potential upside from MNC supply deals; 4) the lack of US FDA overhang; and
5) the potential for M&A (given the succession issues).
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