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Cipla ---------------------------------------------------------------------------Upgrade to OUTPERFORM
Upside from margin improvement has started to play out
● We upgrade Cipla to OUTPERFORM (from Neutral), given: (1)
material improvement in margins in 1Q12, (2) better-thanexpected
ramp up at Indore SEZ facility and (3) the company
focusing more on profitability now.
● 1Q12 EBITDA margins increased by 470 bp versus 2H FY11, as:
(1) Low margin ARV sales are now reduced from 13% of sales to
<10%, (2) loss-making Indore SEZ facility has now turned
profitable and (3) high margin Chronics growth in India was 14%.
● FY12 sales growth guidance is lowered from 12% to 10% driven
by a conscious reduction of ARV sales; however, margin
improvement more than offsets the same. The improvement in
margins appears sustainable, as any possible shortfall should be
offset by further ramp up (and improving mix) of Indore SEZ,
which currently is just breaking even and selling mostly lower
margin oral formulations.
● We raise our FY12/13 EPS estimates by 5% each, factoring in the
improving margin profile. We revise up our target price to Rs355
(from 300) based on 20x FY13 EPS.
Benefits of strategy change starting to materialise now
In the last two to three quarters, we see several changes in Cipla’s
strategies in its key markets. In India, Cipla has taken the field force of
franchises on its rolls (to reduce attrition) and is now focussing on
newer chronic therapies (Oncology, Neuro and Psychiatry). In the US,
Cipla is in the process of reviewing its long-practised partnership
model. Elsewhere, the focus now is more on profitability, and 1Q12
was its reflection when the company reduced exposure to low margin
ARV contracts.
Most of margin expansion in 1Q12 is sustainable
Excluding licensing income and other operating income, EBITDA
margins increased by 470 bp, compared with 2H FY11. Margin
improvement was driven by the following:
● Reduced sales of low margin ARVs: As part of its strategy of
focusing on profitability, Cipla reduced ARV sales to 22% of
formulation exports from 30% last year. Our calculation suggests
this contributes an almost 100 bp improvement in gross margins.
● Indore SEZ breaks even in 1Q12: The ramp up at the Indore
SEZ has been faster than we expected (sales of Rs1.4 bn in 1Q12
against sales of Rs1 bn in FY11). Due to underutilisation, loss at
the Indore SEZ was Rs1.1 bn in FY11, but in 1Q12, the plant was
profitable. The turnaround at the Indore SEZ contributes ~250 bp
margin improvement.
● Higher growth of Chronics in India: Overall sales growth in
India was 10%, with Chronics growing at 14% and Acute portfolio
growing at 6%. Higher sales of Chronics also benefitted the
margins.
The API business grew by 22% in 1Q12, and therefore, the sales of a
high margin API could not be ruled out; but given the quantum of
growth, overall contribution to margins should be limited. Also, the
Indore SEZ is just breaking even now, and as the profitability at the
plant ramps up, margins appears sustainable around the current
levels.
Upgrade to OUTPERFORM; target price increased to Rs355
The management lowered FY12 sales growth guidance from 12% to
10%, but margin improvement more than offsets the impact. Most of
the scale up at the Indore SEZ is currently on account of oral
formulations and as the complex formulations such as Inhalers and
Injectables ramp up, margins should further improve. As a result, we
increase FY12/13 estimates by 5% each, and value Cipla at 20x FY13
EPS at Rs355/share
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cipla ---------------------------------------------------------------------------Upgrade to OUTPERFORM
Upside from margin improvement has started to play out
● We upgrade Cipla to OUTPERFORM (from Neutral), given: (1)
material improvement in margins in 1Q12, (2) better-thanexpected
ramp up at Indore SEZ facility and (3) the company
focusing more on profitability now.
● 1Q12 EBITDA margins increased by 470 bp versus 2H FY11, as:
(1) Low margin ARV sales are now reduced from 13% of sales to
<10%, (2) loss-making Indore SEZ facility has now turned
profitable and (3) high margin Chronics growth in India was 14%.
● FY12 sales growth guidance is lowered from 12% to 10% driven
by a conscious reduction of ARV sales; however, margin
improvement more than offsets the same. The improvement in
margins appears sustainable, as any possible shortfall should be
offset by further ramp up (and improving mix) of Indore SEZ,
which currently is just breaking even and selling mostly lower
margin oral formulations.
● We raise our FY12/13 EPS estimates by 5% each, factoring in the
improving margin profile. We revise up our target price to Rs355
(from 300) based on 20x FY13 EPS.
Benefits of strategy change starting to materialise now
In the last two to three quarters, we see several changes in Cipla’s
strategies in its key markets. In India, Cipla has taken the field force of
franchises on its rolls (to reduce attrition) and is now focussing on
newer chronic therapies (Oncology, Neuro and Psychiatry). In the US,
Cipla is in the process of reviewing its long-practised partnership
model. Elsewhere, the focus now is more on profitability, and 1Q12
was its reflection when the company reduced exposure to low margin
ARV contracts.
Most of margin expansion in 1Q12 is sustainable
Excluding licensing income and other operating income, EBITDA
margins increased by 470 bp, compared with 2H FY11. Margin
improvement was driven by the following:
● Reduced sales of low margin ARVs: As part of its strategy of
focusing on profitability, Cipla reduced ARV sales to 22% of
formulation exports from 30% last year. Our calculation suggests
this contributes an almost 100 bp improvement in gross margins.
● Indore SEZ breaks even in 1Q12: The ramp up at the Indore
SEZ has been faster than we expected (sales of Rs1.4 bn in 1Q12
against sales of Rs1 bn in FY11). Due to underutilisation, loss at
the Indore SEZ was Rs1.1 bn in FY11, but in 1Q12, the plant was
profitable. The turnaround at the Indore SEZ contributes ~250 bp
margin improvement.
● Higher growth of Chronics in India: Overall sales growth in
India was 10%, with Chronics growing at 14% and Acute portfolio
growing at 6%. Higher sales of Chronics also benefitted the
margins.
The API business grew by 22% in 1Q12, and therefore, the sales of a
high margin API could not be ruled out; but given the quantum of
growth, overall contribution to margins should be limited. Also, the
Indore SEZ is just breaking even now, and as the profitability at the
plant ramps up, margins appears sustainable around the current
levels.
Upgrade to OUTPERFORM; target price increased to Rs355
The management lowered FY12 sales growth guidance from 12% to
10%, but margin improvement more than offsets the impact. Most of
the scale up at the Indore SEZ is currently on account of oral
formulations and as the complex formulations such as Inhalers and
Injectables ramp up, margins should further improve. As a result, we
increase FY12/13 estimates by 5% each, and value Cipla at 20x FY13
EPS at Rs355/share
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