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3 reasons why BofA-Merrill is still hot on Cipla

The multinational pharmaceutical company with current market capitalisation of nearly Rs 51,000 crore has a portfolio that includes 2000 products in 65 therapeutic categories with one quality standard globally.

November 21, 2014 / 06:05 PM IST
 
 
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India's second largest drugmaker Cipla reported weak results for the July-September quarter, yet analysts appear to be positive about the company's prospects.


Quarterly sales rose 6 percent, but net profit declined 16 percent.


The stock had outperformed the market over the past one month till 13 November 2014 (when Q2 result was announced) rising 8.30 percent compared with 5.90 percent rise in the Sensex.


The multinational pharmaceutical company with current market capitalisation of nearly Rs 51,000 crore has a portfolio that includes 2000 products in 65 therapeutic categories with one quality standard globally.

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Bank of America Merill Lynch in its India Secular Series of reports, where the brokerage identifies stocks that should be core holdings for investors, feels Cipla is still a buy.


Three reasons why BofA ML is bullish on the stock: (Excerpts from the report)


1) Cipla to triple sales by FY20; respiratory a key driver


The company aims to grow its sales from USD 1.6 billion to USD 5 billion by FY20. We believe this target is feasible and highlight that respiratory should be a key growth driver. With the successful launch of gSeretide pMDI in some EU markets, we believe that its decade-long investment has hit an inflexion point, and we expect the portfolio to contribute 30 percent of FY20E sales and 45 percent of profit after tax (PAT).


2) FDA guidelines offer certainty, expect limited competition


With clarity on the regulatory pathway emerging, we expect the market to open for
serious generic players. US FDA draft guidelines on Advair Diskus offer regulatory
certainty and are perceived to be “easier” than PD as a marker.

Still, given (1) costs/duration of large clinical trials, (2) complex device technology and (3) the need to meet bioequivalence guidelines, we think only a few will develop the product.


3) PAT to jump five-fold; margins/ROIC to expand sharply


We expect a five-fold increase in PAT during FY14-20E, led by 20 percent sales CAGR and 800 bps margin expansion. With its portfolio mix shifting to a high-margin complex portfolio, such as respiratory in developed markets, we expect sharp jumps in EBITDA margins (FY14: 21.2 percent / FY20: 29 percent) and ROIC (FY14: 15 percent / FY20: 35 percent).

BofA ML has raised its target price for Cipla to Rs 770 from Rs 690 earlier, citing strong earnings growth visibility. But the brokerage has cautioned that a delay in approval for combination inhalers in the US/EU is a key risk.

Posted by: Anjali Agarwal

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