Buy Cipla; target of Rs 636: KRChoksey

KRChoksey's report on Cipla

"Cipla’s Q2FY15 results were below street & our estimates. Total income grew by 9.3% YoY to Rs. 2767 crs mainly due to degrowth in exports. However, domestic business showed strong performance ahead of industry growth rate. Company has received licensing income from Salix which is included in other operating income.  EBITDA stood at Rs.558crs down by 1.5% YoY. EBITDA margin stood at 20.2% contracted by 220bps YoY. However, EBITDA margins improved sequentially due to focus on cost management in manufacturing and procurement expenses & favourable product mix. Reported PAT stood at Rs. 299c rs down by 16.6% due to lower other income, higher depreciation cost & increased share of associate loss. EPS for the quarter stood at Rs. 3.7."

"Cipla is focusing on restructuring its business model with 2-3 yrs strategy and is looking to shift from partnership model to front end model for which company will be able to reap the benefits in future. Launch of combination inhalers in EU/US will be a significant opportunity for the company to drive earnings in long term. We expect base business revenues to grow by 14.2% & 18.5% in FY15E & FY16E respectively & earnings to grow at 3.5% & 36.6% in FY15E & FY16E respectively. At CMP of Rs. 624 the stock is trading at 34.8xFY15E & 25.5xFY16E EPS. Since the stock ran sharply in last few months we believe stock is fairly priced at current valuations & therefore change our rating to ‘Hold’ from ‘Accumulate’. We value the base business at Rs 540 & NPV of Rs 96(peak valuation valued at12x Rs8 EPS) from Advair MDI launch in EU to arrive at the target price of Rs 636", says KRChoksey research report.

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