ARV tender to drive growth - Buy Cipla :: Centrum

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Rating: Buy; Target Price: Rs780; CMP: Rs630; Upside: 23.8%



ARV tender to drive growth



We reiterate Buy rating on Cipla with a revised target price of Rs780
(earlier Rs710) based on 24xDecember’16E EPS of Rs32.3. Cipla has
bagged Rand 2.0bn (Rs11.0bn) tender for the supply of ARV products to
S. African Government over the next three years. Being an integrated
player and with no marketing cost, we expect this business to generate
margin of ~20%. The launch of combination inhalers in various global
markets is a positive step. These initiatives are likely to bear
fruit. Key risks to our assumptions include slowdown in global generic
business and delay in approval for its combination inhalers.

$ Large tender from S. African government: Cipla was recently awarded
Rand 2.0bn tender from S. African Government for the supply of
anti-HIV drugs over the next three years from 1st April’15. The
company is an integrated player in anti-HIV segment and has developed
3-in-1 combination for HIV patients. We expect this business to
generate revenues of Rs3.5bn/Rs3.7bn/Rs3.8bn for FY16/FY17/FY18
respectively. Cipla has been recognised as a preferred partner by S.
Africa to fight HIV and AIDS. The company has developed world’s first
3-in-1 combination ARV for the convenience of HIV patients. We expect
the company to emerge as an undisputed leader in anti-HIV treatment.

$ No major impact on margins: We expect the company to generate EBIDTA
margin of 19%/ 20%/21% for FY16/FY17/FY18 respectively from this
tender. Being an integrated player and manufacturing the entire range
of ARV products, we expect it to generate margins of ~20% from this
business as it will not incur any marketing costs. The drugs will be
manufactured in S. Africa. ARV is a high volume business with limited
competition. We expect 20bps decline in overall margins for the
company. Moreover, the company has developed 3-in-1 combination ARV
for the convenience of patients. We expect the company to develop new
combinations for ARV therapy, which will help improve margins.

$ Expanding product portfolio: Cipla is an integrated player in ARV
business and manufactures the entire range of products. The company is
globally recognised for the pioneering role played in HIV/AIDS
treatment as the first pharma company to provide a triple combination
of ARV in African countries for less than a dollar treatment per day.
The company has treated millions of HIV patients since 2001. We expect
it to introduce new ARV combinations from its R & D pipeline and also
reduce the cost of ARV treatment.

$ Recommendation and key risks: We maintain Buy rating on the scrip
with a revised target price of Rs780 based on 24x December’16E EPS of
Rs32.3 with an upside of 23.8% from the CMP. With the launch of
inhalers in various global markets, supply of ARVs to S. African
Government and a strong product pipeline for the global market, we
expect the company to perform well from FY16 onwards.  Key risks to
our assumptions include slowdown in global generic business and delay
in approval for its combination inhalers.



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