Buy Cipla; target of Rs 750: Edelweiss

Edelweiss' report on Cipla

"Cipla’s (CIPL) Q4FY15 EBITDA margin (16.4%) was below estimate with consolidation of acquired entities and bunching up of R&D diluting the leverage from strong growth. Exports growth and improvement in gross margin are key positives and the crux of our thesis. We believe FY16 guidance (15% growth, 150bps margin expansion) is conservative as its initiatives / pipeline start delivering. Operating leverage and mix will drive 42% EPS CAGR (highest in the sector) and multiple triggers will support premium valuations. Initial success with Advair MDI approvals (7 countries in EU, M/S gains) encourages us to add INR100/share of risk adjusted NPV for respiratory franchise to our target price. Our revised target price is INR750 (INR770 earlier) — base business at INR650 (17x FY17E) plus respiratory franchise NPV of INR100. Maintain ‘BUY’ and CIPL as our top large-cap conviction pick."

"We believe CIPL’s guidance is conservative given several recent initiatives: a) EU inhalers ramp up – already launched in 7 countries;  more launches across EU (including the UK) to follow; b) US sales can grow strongly – niche launches (Pulmicort) can accelerate growth; c) Nexium (Teva partner USD2bn market) will continue to benefit CIPL with limited competition in sight; d) South Africa - Teva deal could accelerate growth; e) Sovaldi launch in India and EMs; f) better realisations from newly established front ends. We cut our estimates to factor a muted Q4FY15, but forecast EPS to double over FY15-17 as operating leverage and mix benefits kick in. Valuations at 18.5x FY17E (adjusted for NPV) are attractive. We maintain ‘BUY/SO’ ", says Edelweiss research report.

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