Reduce Cipla; target of Rs 338: PINC Research

“Cipla reported Q3FY12 results which were lower than our and street expectations owing to the rationalization of sales in the export markets. The domestic segment clocked growth of 18.4% YoY driven by the low-margin generic segment. Indore SEZ reported sales of Rs1.3bn for the quarter. The company has maintained its export sales growth guidance of 10-12% for FY12. ARV business contribution came in at 23-25% of sales. Gross margins improved on back of the lower material costs in tandem to the rationalization being undertaken. However, the OPM was lower than expected impacted by the increase in employee costs as well as SG&A expenses. Cipla expects the full impact of rationalization to fructify over the next few quarters.”

“Cipla reported sales of Rs17.1bn, up 14.0% YoY lower than our estimates. The domestic sales clocked noticeable improvement with growth of 18.4% YoY driven by generic segment, while the export segment growth disappointed at mere 10% YoY inspite of rupee depreciation during the quarter. The lower sales growth on the export front was on account of rationalization of sales in certain geographies. In constant currency, export sales were flat YoY. Indore SEZ contributed Rs1.3bn during the quarter. Cipla reported OPM of 20.2% (ex tech fees), below our estimates of 24.9%, as the lower raw material costs which boosted the gross margins was nullified by the increase in employee costs and SG&A cost. The employee cost went up by 38.8% YoY to Rs1.87bn while SG&A cost increased by 13.7% YoY to Rs4.6bn. The company reported net profit of Rs2.7bn up 16.0% YoY.”

“The stock is currently trading at 25.0x FY12E and 22.3x FY13E earnings. We maintain our REDUCE rating on the stock with a target price of Rs338. We have valued the stock at 22x one year forward earnings,” says PINC Research report.

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