Buy Cipla - Fairwealth Institutional Research

Chemical, Industrial & Pharmaceutical Laboratories (CIPLA) was incorporated in 1935 by Khwaza Abdul Hameid. The company focuses on development of new formulations and has a wide range of pharmaceutical products such as prescription drugs, bulk drugs, animal products and pesticides. It also offers a wide range of food and beverages, baked foods, oral hygiene products, detergents, room fresheners and personal care products. It is a market leader in domestic formulations in India. Cipla has foreign operations in more than 100 countries and has more than 5000 product registrations.

Investment Thesis:

- The performance of Cipla for the second quarter was better than expectations. The management has revised the revenue target upwards to 13-15%. OPM's are expected to be 23-23% for FY13. Management expects PAT growth to outperform the revenue growth.

- Cipla has witnessed the tremendous growth in last quarter due to the launch of the CFCfree inhalers. The inhalers help consolidate the position in European and US markets. In last quarter, the share of exports was ~60% of the total revenues, thanks to the firm positions in Africa, US and Latin America.

- The domestic formulation sales contribution to the total revenues stood at ~40% and grew at 30% in in last quarter.The company has decided to launch itself more vigorously in the domestic market with new therapies such as oncology and neuro-psychiatry. Also it has strategise to penetrate the domestic and rural markets with new anti-asthmatic and antiarthritis medicines.

- Large capex utilised by the company over last few years will help in rapid expansion and improved asset utilisation. The better product-mix with lower proportion of anti-retroviral has improved the business. In US, the company has strategic partnerships with 22 firms to launch 118 new products that strengthens revenue visibility in the coming quarters. It also has strong product peipeline of ANDA's, of which 49 has been launched and 30 are pending for approval.

- Q2FY13 results: Second quarter results came as a positive surprise and net profit rose to Rs 500 cr, up 90% on yoy basis. Net sales increased 33% from last year to Rs 2146 cr. EBITDA margin surged to 31% as against 22.7% in Q2FY12. The results were far better than any estimate and management too has clarified that such kind of numbers are difficult to sustain.

Valuation: With large capex in the last few years and better product-mix now, Cipla is in able position to expand rapidly. The inhaler market potential across the world for Cipla is more than USD 3 billion. The uptick of revenue as well as PAT guidance indicates that new launches and anti-biotic and anti-asthmatic business is running better than expected. At CMP of Rs.396, we recommend a BUY rating for the stock with a target price of Rs. 480.

Source : Equity Bulls

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