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Cipla (CIPL.BO)
Better Mix Drives 2Q Beat
Better mix, forex gain aids 2Q beat — Net profit came in c9% ahead of our estimate
despite in line sales, as a better product mix and forex gain buoyed profitability. While
part of this would even out over the full year, we believe the weaker INR and easing
base effect would keep growth rates healthy in 2H. The froth is out of valuations after
last year’s underperformance last year and downside looks limited. Maintain Neutral.
Revenues in line, mix better — Sales growth was in line at 11% YoY but mix
improved, with India (+12%) and formulation exports (+13.2%) growing faster than API
exports (-5.2%). Other operating income (+30.2%) was also buoyed by forex gain of
Rs140m, leading to overall revenue growth of 11.1% in 2Q.
Margins better — The better revenue mix along with lower input prices led to
significantly better material cost – RM/Sales dipped 490bps to 41.1%. This helped
offset the continued increase in staff cost (+36.3%: annual increments, headcount
addition) and other expenses (+21.7%: overheads in new facilities). This led to 192bps
YoY improvement in EBIDTA margin, which along with lower-than-expected
depreciation, translated into 17.5% higher net income (c9% ahead of Citi estimate).
Revenue guidance maintained, capex remains heavy — Cipla reiterated its 10-12%
topline growth guidance for FY12 and indicated that margins would be in line with what
it achieved in 1H. We expect the favorable mix effect on margin to normalize over the
full year but believe that the weaker INR (vs. the US$) would keep it buoyant. It also
reiterated its FY12 capex guidance (cRs5-6bn) and indicated that a similar sum would
be invested in FY13 as well.
Other takeaways — a) No supplies of olanzapine to Teva (came as a surprise to us);
b) Indore SEZ would take c3-4 years to scale up – till then would partially service
demand shifted from other facilities; c) Positive on inhalers opportunity in the EU –
expects more approvals over the next year; d) Forward contracts worth cUS$190m
outstanding – adequate to hedge net dollar exposure.
Research Best Ideas Update
Relative Call – Adding Lupin and Glaxosmithkline Pharma,
Extending Dr Reddy and Cipla.
Summary – We name Lupin a Most Preferred stock and Glaxosmithkline Pharma a
Least Preferred stock relative to our fundamental analyst coverage for the next
three months.
Furthermore, we extend our relative call on Dr Reddy as a Most Preferred stock and
Cipla as a Least Preferred stock relative to our fundamental analyst coverage for
the next three months. Our last call was made on 02 Sep 2011.
Rationale - Extending earlier calls
Cipla
Catalyst and Thesis - Valuations look rich, and a subdued earnings trend could
continue for another quarter before growth rates recover.
Glaxosmithkline Pharmaceutical
Catalyst and Thesis - Valuations look expensive. Likely to be hit hard if proposed
DPCO 2011 is implemented. Limited upside.
Lupin
Catalyst and Thesis - Attractive valuations (c.15x FY13E), triggers available in the
form of several niche product opportunities that will play out for the next 6-9 months.
Dr Reddy
Catalyst and Thesis - Valuations look attractive after the stock's recent
underperformance against the BSE Sensex. Potential near-term catalysts include
upside from generic Arixtra (fondaparinux) and Zyprexa (olanzapine).
Cipla
Company description
Cipla is a leading Indian pharma company with more than 50% of exports and
product registrations in over 180 countries. It has a well-diversified portfolio across
therapies including anti-asthma, anti-inflammatory, cardiac, anti-retroviral, anticancer,
eye/ear preparations, dermatology, anti-ulcerant, anti-malaria and critical
care. It is one of the leading players globally in respiratory care, with experience in
developing complex technologies in inhalation therapy. It has a strong branded biz
in India and is among the top-2 players in the highly fragmented Indian Pharma
market. To de-risk its business model, it has tied up with several partners for
overseas markets.
Investment strategy
We rate Cipla Neutral (2) with a TP of Rs310. The stock has underperformed
significantly over the last year, taking most of the froth out of valuations. The sharp
depreciation in the INR (v/s the US$) over the last few weeks should also help its
sizeable exports business. These make us less negative on the stock than we were
earlier. However, Cipla remains our least favored business among the sector
leaders. We believe it could be vulnerable, given its lack of control over the front
end in the US and EU generics markets. In an industry susceptible to pricing
pressure, Cipla, being one of the weaker parts of the supply chain, could bear the
brunt in our view - reflected in its deteriorating return ratios. This prevents us from
getting more constructive on the stock till valuations de-rate further.
Valuation
Cipla is a steadily growing company, thus we use P/E as the base valuation tool for
the company. Our target price of Rs310 is based on 20x Sep 12E earnings.
Although Cipla is an Indian pharma major, we believe it should trade at a marginal
discount to peers in the sector such as DRL, justified by the lower value addition to
the business (lack of its own front-end in the regulated markets and ownership of
IPR). There are few signs of this changing. However, while we value the latter's
patent challenge opportunities separately from the base business, we are unable to
do the same for Cipla, given the lack of information on its tie-ups with different
partners. Hence, we apply the same multiple (20x) as we do for the sector leaders
such as DRL to Cipla's base business earnings to factor in any potential "one-off"
upside that may come through from time to time.
Risks
The key downside risks to our target price and rating include: a) Inability to scale up
utilization levels at the Indore SEZ, as planned; b) Any significant slowdown in the
Indian market (accounts for c45% of sales); c) If any of its partners gets acquired / is
part of a merger, it may lose out on some of the earlier contracted business. The
key upside risks to our target price and rating include: a) the company doing better
operationally than forecast, due to gains from rupee depreciation; b) any move to
front-end in target markets could give further support to valuations; c) any
exclusivity for its partners could also sustain growth beyond our expectations.
Dr Reddy
Valuation
Our Rs1,835 target price for DRL is based on a sum-of-the-parts valuation
approach. We use a target multiple of 20x to value DRL's core earnings. This is in
line with its historical trading range. At 20x Sep'12E earnings, we value DRL's base
business at Rs1,760. We continue to value DRL's Para IV pipeline separately at
Rs75, based on a probability adjusted DCF valuation. We use a range of
probabilities from 25% to 90%, based on individual product dynamics, and a
discount factor of 12.5% for the opportunities being targeted over the next few
years.
Risks
Key downside risks to our target price include: (1) Lower than expected market
share in fondaparinux (Arixtra) or the Allegra OTC franchise in the US could entail
downward revision of estimates; (2) Continued sluggishness in the Indian market
(c17% of sales); (3) Stiffer competition / regulatory pressure on pricing in
Russia/CIS.
(REDY.BO; Rs1,641.95; 1)
Glaxosmithkline Pharmaceutical
Valuation
Our target price of Rs2,200 for GSK Pharma is based on 25x Dec 2012E earnings.
Given its steady earnings growth, we believe P/E is best suited to value GSK
Pharma. GSK has traded at 15-60x in the past 7-8 years, with a median of c23x
over the last five years. GSK launched its first patented product in India two years
back and has announced plans to launch a few more over the next two years. While
we expect greater clarity on the implementation of the IPR regime over the next few
years, we believe that the upside on this front for most companies is likely to be
limited in the near to medium term. As such, we believe that 25x is a suitable fairvalue
multiple.
Risks
The key upside risks to our hypothesis include: a) Higher than expected product
launches - esp. from the patented basket & vaccines; b) Any accretive acquisitions,
given the sizeable cash balance (cUS$450m+) on its books. The key downside risks
to our hypothesis include: a) Slowdown in Indian market growth, given that GSK
operates entirely in this market and is among the top 5 companies; b) Further price
control related regulations in India, given more than 20% of the current revenues
are from price controlled products. Any of these risk factors could cause the shares
to deviate from our target price.
(GLAX.BO; Rs2,020.40; 2)
Lupin
Valuation
Given that pharma is a growth sector, we use P/E as our primary method to value
the base business of pharma companies. Lupin has historically (last six to seven
years) traded in a band of 10-34x one-year forward earnings. We value Lupin at 20x
12m forward earnings, in line with the sector leaders such as Cipla and Dr Reddy’s,
due to its leadership in key markets/products & robust financial metrics. At 20x
Dec12E recurring FDEPS, we arrive at a target price of Rs565.
Risks
Key risks to our target price include: 1) Earlier than expected generic competition in
Suprax; 2) INR appreciation would hurt, given its exposure to global markets; 3)
Reasonable exposure to the domestic formulations market (c31% of sales) leaves
Lupin vulnerable to any significant widening of the price control net or slow down in
industry growth. 4) Inability to effectively scale up the Kyowa operations or Antara
sales.
(LUPN.BO; Rs466.60; 1)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cipla (CIPL.BO)
Better Mix Drives 2Q Beat
Better mix, forex gain aids 2Q beat — Net profit came in c9% ahead of our estimate
despite in line sales, as a better product mix and forex gain buoyed profitability. While
part of this would even out over the full year, we believe the weaker INR and easing
base effect would keep growth rates healthy in 2H. The froth is out of valuations after
last year’s underperformance last year and downside looks limited. Maintain Neutral.
Revenues in line, mix better — Sales growth was in line at 11% YoY but mix
improved, with India (+12%) and formulation exports (+13.2%) growing faster than API
exports (-5.2%). Other operating income (+30.2%) was also buoyed by forex gain of
Rs140m, leading to overall revenue growth of 11.1% in 2Q.
Margins better — The better revenue mix along with lower input prices led to
significantly better material cost – RM/Sales dipped 490bps to 41.1%. This helped
offset the continued increase in staff cost (+36.3%: annual increments, headcount
addition) and other expenses (+21.7%: overheads in new facilities). This led to 192bps
YoY improvement in EBIDTA margin, which along with lower-than-expected
depreciation, translated into 17.5% higher net income (c9% ahead of Citi estimate).
Revenue guidance maintained, capex remains heavy — Cipla reiterated its 10-12%
topline growth guidance for FY12 and indicated that margins would be in line with what
it achieved in 1H. We expect the favorable mix effect on margin to normalize over the
full year but believe that the weaker INR (vs. the US$) would keep it buoyant. It also
reiterated its FY12 capex guidance (cRs5-6bn) and indicated that a similar sum would
be invested in FY13 as well.
Other takeaways — a) No supplies of olanzapine to Teva (came as a surprise to us);
b) Indore SEZ would take c3-4 years to scale up – till then would partially service
demand shifted from other facilities; c) Positive on inhalers opportunity in the EU –
expects more approvals over the next year; d) Forward contracts worth cUS$190m
outstanding – adequate to hedge net dollar exposure.
Research Best Ideas Update
Relative Call – Adding Lupin and Glaxosmithkline Pharma,
Extending Dr Reddy and Cipla.
Summary – We name Lupin a Most Preferred stock and Glaxosmithkline Pharma a
Least Preferred stock relative to our fundamental analyst coverage for the next
three months.
Furthermore, we extend our relative call on Dr Reddy as a Most Preferred stock and
Cipla as a Least Preferred stock relative to our fundamental analyst coverage for
the next three months. Our last call was made on 02 Sep 2011.
Rationale - Extending earlier calls
Cipla
Catalyst and Thesis - Valuations look rich, and a subdued earnings trend could
continue for another quarter before growth rates recover.
Glaxosmithkline Pharmaceutical
Catalyst and Thesis - Valuations look expensive. Likely to be hit hard if proposed
DPCO 2011 is implemented. Limited upside.
Lupin
Catalyst and Thesis - Attractive valuations (c.15x FY13E), triggers available in the
form of several niche product opportunities that will play out for the next 6-9 months.
Dr Reddy
Catalyst and Thesis - Valuations look attractive after the stock's recent
underperformance against the BSE Sensex. Potential near-term catalysts include
upside from generic Arixtra (fondaparinux) and Zyprexa (olanzapine).
Cipla
Company description
Cipla is a leading Indian pharma company with more than 50% of exports and
product registrations in over 180 countries. It has a well-diversified portfolio across
therapies including anti-asthma, anti-inflammatory, cardiac, anti-retroviral, anticancer,
eye/ear preparations, dermatology, anti-ulcerant, anti-malaria and critical
care. It is one of the leading players globally in respiratory care, with experience in
developing complex technologies in inhalation therapy. It has a strong branded biz
in India and is among the top-2 players in the highly fragmented Indian Pharma
market. To de-risk its business model, it has tied up with several partners for
overseas markets.
Investment strategy
We rate Cipla Neutral (2) with a TP of Rs310. The stock has underperformed
significantly over the last year, taking most of the froth out of valuations. The sharp
depreciation in the INR (v/s the US$) over the last few weeks should also help its
sizeable exports business. These make us less negative on the stock than we were
earlier. However, Cipla remains our least favored business among the sector
leaders. We believe it could be vulnerable, given its lack of control over the front
end in the US and EU generics markets. In an industry susceptible to pricing
pressure, Cipla, being one of the weaker parts of the supply chain, could bear the
brunt in our view - reflected in its deteriorating return ratios. This prevents us from
getting more constructive on the stock till valuations de-rate further.
Valuation
Cipla is a steadily growing company, thus we use P/E as the base valuation tool for
the company. Our target price of Rs310 is based on 20x Sep 12E earnings.
Although Cipla is an Indian pharma major, we believe it should trade at a marginal
discount to peers in the sector such as DRL, justified by the lower value addition to
the business (lack of its own front-end in the regulated markets and ownership of
IPR). There are few signs of this changing. However, while we value the latter's
patent challenge opportunities separately from the base business, we are unable to
do the same for Cipla, given the lack of information on its tie-ups with different
partners. Hence, we apply the same multiple (20x) as we do for the sector leaders
such as DRL to Cipla's base business earnings to factor in any potential "one-off"
upside that may come through from time to time.
Risks
The key downside risks to our target price and rating include: a) Inability to scale up
utilization levels at the Indore SEZ, as planned; b) Any significant slowdown in the
Indian market (accounts for c45% of sales); c) If any of its partners gets acquired / is
part of a merger, it may lose out on some of the earlier contracted business. The
key upside risks to our target price and rating include: a) the company doing better
operationally than forecast, due to gains from rupee depreciation; b) any move to
front-end in target markets could give further support to valuations; c) any
exclusivity for its partners could also sustain growth beyond our expectations.
Dr Reddy
Valuation
Our Rs1,835 target price for DRL is based on a sum-of-the-parts valuation
approach. We use a target multiple of 20x to value DRL's core earnings. This is in
line with its historical trading range. At 20x Sep'12E earnings, we value DRL's base
business at Rs1,760. We continue to value DRL's Para IV pipeline separately at
Rs75, based on a probability adjusted DCF valuation. We use a range of
probabilities from 25% to 90%, based on individual product dynamics, and a
discount factor of 12.5% for the opportunities being targeted over the next few
years.
Risks
Key downside risks to our target price include: (1) Lower than expected market
share in fondaparinux (Arixtra) or the Allegra OTC franchise in the US could entail
downward revision of estimates; (2) Continued sluggishness in the Indian market
(c17% of sales); (3) Stiffer competition / regulatory pressure on pricing in
Russia/CIS.
(REDY.BO; Rs1,641.95; 1)
Glaxosmithkline Pharmaceutical
Valuation
Our target price of Rs2,200 for GSK Pharma is based on 25x Dec 2012E earnings.
Given its steady earnings growth, we believe P/E is best suited to value GSK
Pharma. GSK has traded at 15-60x in the past 7-8 years, with a median of c23x
over the last five years. GSK launched its first patented product in India two years
back and has announced plans to launch a few more over the next two years. While
we expect greater clarity on the implementation of the IPR regime over the next few
years, we believe that the upside on this front for most companies is likely to be
limited in the near to medium term. As such, we believe that 25x is a suitable fairvalue
multiple.
Risks
The key upside risks to our hypothesis include: a) Higher than expected product
launches - esp. from the patented basket & vaccines; b) Any accretive acquisitions,
given the sizeable cash balance (cUS$450m+) on its books. The key downside risks
to our hypothesis include: a) Slowdown in Indian market growth, given that GSK
operates entirely in this market and is among the top 5 companies; b) Further price
control related regulations in India, given more than 20% of the current revenues
are from price controlled products. Any of these risk factors could cause the shares
to deviate from our target price.
(GLAX.BO; Rs2,020.40; 2)
Lupin
Valuation
Given that pharma is a growth sector, we use P/E as our primary method to value
the base business of pharma companies. Lupin has historically (last six to seven
years) traded in a band of 10-34x one-year forward earnings. We value Lupin at 20x
12m forward earnings, in line with the sector leaders such as Cipla and Dr Reddy’s,
due to its leadership in key markets/products & robust financial metrics. At 20x
Dec12E recurring FDEPS, we arrive at a target price of Rs565.
Risks
Key risks to our target price include: 1) Earlier than expected generic competition in
Suprax; 2) INR appreciation would hurt, given its exposure to global markets; 3)
Reasonable exposure to the domestic formulations market (c31% of sales) leaves
Lupin vulnerable to any significant widening of the price control net or slow down in
industry growth. 4) Inability to effectively scale up the Kyowa operations or Antara
sales.
(LUPN.BO; Rs466.60; 1)
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