Hold Cipla; target of Rs 425: ICICIdirect

ICICIdirect.com`s research report on Cipla

“Cipla, revenues grew only 8.3% YoY to Rs 2720 crore (I-direct estimate: Rs 2811 crore) despite ~17% growth in the Indian business to Rs 1289 crore and ~13% growth in export formulations to Rs 1218 crore due to a 60% decline in the other operating income. EBITDA margins declined 754 bps YoY to 19.9% but higher than Idirect estimate of 17.0% due to higher than anticipated improvement in gross profit margins. The dip in margins on a YoY basis was due to (i) increase in R&D cost and (ii) consolidation of low Cipla Medpro business. EBITDA on absolute basis declined 21% to Rs 541.8 crore (I-direct estimate: Rs478 crore). Spike in the depreciation and higher losses at the associate level led to net profit de-growth of 39% to Rs 294.6 crore (I-direct estimate: Rs 285.5 crore).” “Formulation exports constitute 49% of total revenues. To improve the quality of exports, Cipla has undertaken scores of measures, of late. Partnership deals and participation in global tenders were the growth drivers in the past for exports. The focus has now shifted to front-end model, especially for the US and a gradual shift from loss making HIV and other tenders to more lucrative respiratory and other opportunities in the US and EU. Recent acquisitions in Africa and other geographies is testimony to this transformation. We expect export sales to grow at a CAGR of 20% to Rs 7144 crore during FY14-16E. Key drivers will be 1) launch of combination inhalers in EU markets, 2) incremental product launches by its partners and increase in own product filings in the US, 3) reduced focus on the ARV tender business and at the same time increased focus on PEPFAR like tenders and 4) Medpro consolidation.” “Going by the Q1FY15 numbers, the company seems to be on track to achieve the 20-21% EBITDA margin guidance. Though it is pretty early to confirm a full circle of successful transformation, it seems that things may have started working, at least on the margins front. However, that may take some toll on topline growth, which was visible during the quarter as exports growth was below estimates. Assuming a three to five year gestation period from FY11, the year in which the whole exercise was initiated, we expect the recovery process to continue slowly but surely. We have valued the stock at Rs 425 i.e.19x FY16E EPS of Rs 22.4,” says ICICIdirect.com research report.  

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