Cipla down 2% on Nomura downgrade, valuations expensive

However, the brokerage doesn’t expect revenue composition to change significantly, and rise in R&D spend should result in limited EBITDA margin expansion.

It believes investors expectations from Cipla’s inhaler franchise have risen after the recent launch of Seretide MDI in select EU markets. The approval is a positive development, but approvals for other high-value inhalers in the EU and the US still have significant regulatory challenges.

Cipla, on September 2, launched Metered Dose Inhaler (MDI) called Serroflo or Salmeterol/Fluticasone combination in Germany and Sweden. The total market size there is less than USD 100 million. This new launch is a substitute for Advair. The total market size for inhalers - Advair/ Seretide - is around USD 800 million in Europe and UK constitutes nearly half of that, which comes up to USD 350 million.

For Seretide MDI, Nomura is cautious as generic penetration and substitutability of inhalers is likely to be lower and Glaxo may be aggressive on pricing.

"Our industry checks suggest that Cipla has priced Seretide MDI at 40 percent discount to the innovator in Germany which is a small market. The discount could be higher for the UK, which is a much larger market. Further, the discount will likelyincrease with additional competition," the brokerage said.

So it prefers Dr Reddy’s, which is at a similar market cap and trades at 36 percent/25 percent discount to Cipla on FY15F/FY16F P/E.

At 10:42 hours IST, the scrip of Cipla was quoting at Rs 613.50, down Rs 6.15, or 0.99 percent on the BSE.

Posted by Sunil Shankar Matkar