Cipla -Not out of woods yet :: Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Cipla
Not out of woods yet
Event
 Cipla reported 4Q FY11 total revenue of Rs16.7bn (up 21% YoY), and PAT of
Rs2.1bn (down 22% YoY). Results were greatly below our and consensus
estimates. EBITDA margin declined 70bps YoY and 240bps QoQ on account of
product mix (higher proportion of low margin ARV tender sales) and increased
factory overhead at Indore SEZ. Maintain UP rating with TP of Rs290.

Impact
 FY11 margins impacted due to product mix and increased overhead: For
FY11, the EBITDA margin declined 290bps YoY, primarily driven by higher
COGS (up 230 bps YoY) due to a larger proportion of low margin ARV tender
sales. Cipla’s ARV business contributes ~30% of the total formulation exports of
which 50 to 60% is through tenders yielding low margin. Increased overhead
from the new Indore SEZ impacted margins negatively (loss of Rs1.1b in FY11).
The ramp-up of sales in FY12 from Indore SEZ (~ 10% of FY12 sales) should
help optimize utilization and ease margin pressure somewhat.
 Domestic formulation – muted FY11 but increasing focus: FY11 domestic
sales grew by 12.2% YoY which is below the industry average. 4QFY11
domestic sales grew by 14.7% YoY. Cipla added 500 sales reps this year and is
planning to expand the field force further from 6,000 reps to 7,000 reps. Given
the strong sales push and focus on additional therapies (like Oncology &
Psychiatry) we have built in 16% growth for domestic formulations in FY12E.
 High export sales on account of higher ARV sales: 4QFY11 exports sales
grew 28.2% YoY driven by both formulation (up 21.0% YoY) and API (up 58.7%
YoY) sales. We believe a higher composition of ARV tender sales in exports will
keep the gross margins under pressure in FY12.
 Management guidance for FY12: Management guided for topline growth of
10-12% for FY12 and operating margin of 18-20%. We have built in a 16%
topline growth and 19% operating profit for FY12. Inhalers for the US and EU
are keenly watched opportunities; however, given the regulatory complexities
involved for approval, we believe any meaningful upside is still 12–18m away.
Earnings and target price revision
 Downward revision of FY11/12 EPS to Rs15/Rs19 from Rs16.4 / Rs19.5,
primarily on account of lower Tech-income assumption.
Price catalyst
 12-month price target: Rs290.00 based on a PER methodology.
 Catalyst: weak quarterly results
Action and recommendation
 Cipla currently trades at 21x FY12 earnings, and we believe current
valuations are still not attractive enough. However we do acknowledge having
corrected ~18% YTD, we believe there is not significant downside from
current levels. We await early signs of a recovery in margins, acceleration in
domestic sales and a better entry point before turning positive.