Buy Cipla; target of Rs 616: KR Choksey

Cipla’s Q1FY17 revenues were below our estimates with a miss on all fronts. Revenues declining 7% YoY to INR 35bn, EBITDA declined 42% to INR 6bn on account of higher contribution from gNexium in the corresponding quarter of the previous year as compared to nil revenues booked from gNexium. EBITDA margins for the quarter stood at 17%. PAT was down 44% YoY to INR 3.7bn. Domestic formulations sales were up by a moderate 5% YoY to INR 14.5bn with a weak export formulations during the quarter which declined by 14% to INR 20.5bn.

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 lowering our revenues by (0.3%)/ 0% for FY17E/ FY18E respectively and our earnings estimates by (9.8%)/ (0.1%) for FY17E/ FY18E respectively. We 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).For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.