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Broking house, DSP Merrill Lynch is bearish on Cipla and has recommended sell rating on the stock.

 

Merrill Lynch report on Cipla:

 

Estimates reduced post profit warning; Maintain Sell 

 

At the Annual General meet last week, Cipla guided to 10-12% revenue growth  for FY08E and indicated that FY08E profits would be lower than FY07 largely due  to poor product mix arising from high HIV contribution, impact of strong rupee and  higher cost of imports from China. Consequently, we are lowering FY08E EPS by 12% (Rs7.8) and FY09E EPS by 13% (Rs8.9) due to lower gross margin trend.  Maintain Sell noting uncertain margin outlook and rich valuations. 

 

Earnings outlook unexciting; Premium valuations 

 

Based on our revised earnings, We estimate 2% EPS CAGR (FY07-FY09E) for  Cipla vs. 19% sector EPS CAGR (FY07-09E). Cipla trades at 22x FY08E and  19.3x FY09E earnings, about 20% premium to its 2-year historical average and  over 25% premium to the Indian pharma sector average on FY09E earnings. 

 

Stock underperformance to continue given lack of triggers 

 

Despite the Stock's sharp 31% absolute underperformance in the past one year,  we expect this trend to continue given lack of visibility on big product upsides (e.g.  generic Flonase approval which is long pending for US) and weak quarters  ahead. For the next two quarters, we estimate Cipla's profits de-grow by 15-20%. 

 

High HIV concentration impacting margins; DPCO overhang 

 

We estimate that over one-third of Cipla's revenues are derived from supply of anti-viral HIV drugs to various government agencies where the margin profile is much lower than the base business. Also, Cipla will likely continue to face margin pressure largely due to high factory overheads resulting from commissioning of various manufacturing units. Further, uncertainty relating to outcome of USD 176 million DPCO litigation liability will likely be a stock overhang.