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UBS Investment Research
Cipla Ltd.
L ooking to change the model
Event: Cipla AGM – Takeaways from the Chairman’s comments
While mgmt. maintained there is no change in their partnership driven export
model, they do seem to be looking to establish some overseas offices. Chairman,
Dr. Y.K. Hamied, remained bullish on potential growth opportunities for the co.
especially in the EU inhaler market and also in the US and longer term in China.
(More details inside).
Impact: Maintain estimates, looking to grow inline with industry
We maintain our estimates. Mgmt. expects to maintain current margin trend and
expects to grow inline with the industry in the domestic market. The current capex
of the co. remains focused on increasing backward integration through addition of
API facilities. Co. also setting up a new R&D facility in Patalganga.
Action: Maintain Sell, EPS growth momentum to remain weak
We maintain our Sell rating on the stock. We believe domestic growth is likely to
be weaker than expected in FY12 limiting any potential upside. We expect an EPS
CAGR of only 12% over FY11-13. We are 8%/9% below consensus for FY12/13
respectively.
Valuation: Trading at 18xFY13 PE, PT Rs 315
We derive our price target using DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool with a WACC of 11%. At
our PT the stock would trade at 20x FY13E earnings.
Cipla Ltd.
In 1935, KA Hamied set up The Chemical, Industrial & Pharmaceutical
Laboratories, now known as Cipla. With a 5.3% market share, it was the largest
domestic pharmaceutical company in India at the end of FY10. The domestic
market accounted for close to 45% of FY10 revenue, while exports accounted
for the rest. In FY10, Cipla's key export markets were Africa at 34%, Americas
25%, Europe 17%, the Middle East 9%, and Australasia for the remainder. The
Hamied family owns 39% of Cipla.
Statement of Risk
We believe general risks include FDA approval, timing of approvals
competition from rival drug therapies, litigation (including the appeal process),
accounting/disclosure, and product pricing from generic competition. Pricing
pressure in the US generic market continues to remain severe.
Cipla's export business remains very difficult to forecast in terms of timing of
revenues as lumpiness of customer orders can make quarterly sales volatile.
Cipla is setting up new plants for its export business. Delay in
construction/approvals of facilities can impact revenues and profits. Export
growth depends on product approvals as well as Cipla’s partners’ focus and
success in litigation on these products. Sharp rise in rupee against other major
currencies could result in further cost pressure and lower profitability.
Technology fees remain extremely volatile and have limited visibility, adding to
volatility of quarterly profits for Cipla.
Cipla is in litigation with the Indian government over certain drugs, on whether
these drugs fall within the purview of government price control. Incase, the
company loses litigation against the government, the company faces significant
liability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Cipla Ltd.
L ooking to change the model
Event: Cipla AGM – Takeaways from the Chairman’s comments
While mgmt. maintained there is no change in their partnership driven export
model, they do seem to be looking to establish some overseas offices. Chairman,
Dr. Y.K. Hamied, remained bullish on potential growth opportunities for the co.
especially in the EU inhaler market and also in the US and longer term in China.
(More details inside).
Impact: Maintain estimates, looking to grow inline with industry
We maintain our estimates. Mgmt. expects to maintain current margin trend and
expects to grow inline with the industry in the domestic market. The current capex
of the co. remains focused on increasing backward integration through addition of
API facilities. Co. also setting up a new R&D facility in Patalganga.
Action: Maintain Sell, EPS growth momentum to remain weak
We maintain our Sell rating on the stock. We believe domestic growth is likely to
be weaker than expected in FY12 limiting any potential upside. We expect an EPS
CAGR of only 12% over FY11-13. We are 8%/9% below consensus for FY12/13
respectively.
Valuation: Trading at 18xFY13 PE, PT Rs 315
We derive our price target using DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool with a WACC of 11%. At
our PT the stock would trade at 20x FY13E earnings.
Cipla Ltd.
In 1935, KA Hamied set up The Chemical, Industrial & Pharmaceutical
Laboratories, now known as Cipla. With a 5.3% market share, it was the largest
domestic pharmaceutical company in India at the end of FY10. The domestic
market accounted for close to 45% of FY10 revenue, while exports accounted
for the rest. In FY10, Cipla's key export markets were Africa at 34%, Americas
25%, Europe 17%, the Middle East 9%, and Australasia for the remainder. The
Hamied family owns 39% of Cipla.
Statement of Risk
We believe general risks include FDA approval, timing of approvals
competition from rival drug therapies, litigation (including the appeal process),
accounting/disclosure, and product pricing from generic competition. Pricing
pressure in the US generic market continues to remain severe.
Cipla's export business remains very difficult to forecast in terms of timing of
revenues as lumpiness of customer orders can make quarterly sales volatile.
Cipla is setting up new plants for its export business. Delay in
construction/approvals of facilities can impact revenues and profits. Export
growth depends on product approvals as well as Cipla’s partners’ focus and
success in litigation on these products. Sharp rise in rupee against other major
currencies could result in further cost pressure and lower profitability.
Technology fees remain extremely volatile and have limited visibility, adding to
volatility of quarterly profits for Cipla.
Cipla is in litigation with the Indian government over certain drugs, on whether
these drugs fall within the purview of government price control. Incase, the
company loses litigation against the government, the company faces significant
liability.
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