Buy Cipla; target of Rs 630: Khambatta Securities

Khambatta Securitie's research report on Cipla

After Cipla experienced changes in top-level Management in the previous quarter, the company’s performance has started to improve. We expect it to continue improving performance at top-line as well as bottom-line level over the next few years. Cipla reverted to business to business (B2B) model from direct to market (DTM) model in Europe and withdrew presence from some smaller markets during the previous quarter and focus has shifted back to traditional growth regions such as Africa, US and India. Domestic market grew 21% y-o-y favoured by seasonality during the quarter. New launches are expected to continue driving top-line in this region. Recent acquisitions such as InvaGen and Exelan are expected to support new product launches in US. Meanwhile tender business is expected to be the key focus area in South Africa. Completion of Actavis deal which was approved by Competition Commission recently is expected to further benefit growth and profitability from this region. Management expects to launch 8-10 products in FY 2017. Launch of combination inhalers in developed market would be the key highlight for the company in the coming years.

Considering the revenue growth and profitability improvement expectation over the next 2 years, we value the business at 23.0x FY 2018E EPS of Rs 27.3 i.e Rs 627 per share. Cipla valuation through DCF is Rs 633 per share. Consequently, using a weighted average methodology we arrive at a share price of Rs 617, generating a 20.1% potential upside from current levels. Hence, we upgrade our rating to ‘Strong Buy’ for Cipla common stock.