Buy Cipla;target of Rs 649: Khambatta Securities

Khambatta Securities's research report on CiplaCipla’s total income increased 12.3% y-o-y but decreased 10.0% q-o-q to Rs 31,066 mn in 3Q FY16 marginally below our expectation for the quarter. Growth was driven by 32.5% y-o-y growth in formulation exports while domestic sale was flat during the quarter. EBITDA decreased 18.1% y-o-y and 42.5% q-o-q to Rs 4,537 mn in 3Q FY16. EBITDA margin decreased 542 bps y-o-y and 826 bps q-o-q to 14.6% falling short of our expectation primarily due to higher than expected Cost of Goods Sold and employee benefit expense as a percentage of sales during the quarter. Adjusted net profit decreased 8.1% y-o-y and 34.9% q-o-q to Rs 2,639 mn in 3Q FY16. We have adjusted for gain of Rs 557.1 mn, on sale of investment in an associate (Biomab Holdings Ltd.) during the quarter. Adjusted net margin decreased 189 bps y-o-y and 325 bps q-o-q to 8.5%, falling short of our expectation for the quarter mainly due to poorer than expected performance at operating level. The company also clocked low tax rate as it used MAT credit of Rs 551.6 mn during the quarter.Domestic sale was negatively impacted by change in distribution policy as well as decline in base business. Exports continued to benefit from sale of generic Nexium during the quarter. Cipla has changed its marketing strategy from partnership model to direct sales model pressuring margins but this strategic decision is expected to benefit top-line and margins in the medium term. We continue to believe the company’s strong product pipeline (including high margin inhalers) and tenders will drive top-line growth rate going forward. Hence, we expect total income to grow at a CAGR of 19.2% over the next 3 years. But margins are expected to improve in the long term on back of successful launch of inhalers in the European and US markets. Acquisition of InvaGen is expected to be revenue 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.

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