Buy Cipla; target of Rs 616: KR Choksey

Cipla’s Q2FY17 revenues and EBITDA was in-line with our estimates with a miss on PAT front on account of higher depreciation. Revenues for the quarter grew by 9% to INR 36.7 bn (compared to our estimates of INR 36.7 bn) despite meaningful contribution from gNexium in Q2FY16, EBITDA declined 13% to INR 6.8 bn with EBITDA margins for the quarter at 18.1%. PAT was down 35% YoY to INR 3.5bn (as compared to our estimates of INR 3.8 bn) on account of first full quarter of purchase method accounting for InvaGen acquisition resulting in a higher depreciation. Cash generated from Operations stood at INR 6.8 bn and R&D investments for the quarter were at INR 3 bn. Domestic formulations sales were up by a healthy 21% YoY to INR 14.7 bn on account of seasonality coupled with growth across all therapies for Cipla. North American revenues were up 38% YoY to INR 6.6 bn on account of acquisition of InvaGen & Exelan, couple with own label launch despite offset from decline in gNexium revenues in the corresponding quarter of last year. API sales during the quarter declined 50% YoY to INR 1.1 bn due to partner specific issues.

Cipla is focusing on restructuring its business model with 2-3 years strategy. Launch of combination inhalers in EU/US will be a significant opportunity for the company to drive earnings in long term. We expect North American revenues to grow at 21% CAGR over FY16-18E on account of integration of InvaGen and Exelan into Cipla and ramp-up in Cipla’s own front-end model in US. We expect overall export formulations to grow at a healthy 14.6% CAGR over FY16-18E. We maintain our ‘BUY’ rating and value the company using SOTP valuation with the base business of the company at 20xFY18E EPS of INR 28.7 and Inhaler portfolio at INR 42 to arrive at a target price of INR 616 (unchanged).