Cipla Limited - Too Early to count Medpro upside - Antique

Event

Cipla Medpro South Africa posted a 32% fall in diluted headline earnings per share for CY2012. Exchange-rate fluctuations and a rise of just 2.1% in the single exit price for medicines were the key challenges that the company was confronted with for the year. Revenue rose 30% to R2.297bn. and diluted EPS fell to 37.5c from 55c in the previous year. While the total pharmaceutical market grew 7.1% in rand value, Cipla Medpro posted growth of 15.3%. The reporting period also saw restatement of 2012 results on account of change in accounting practices.

Background

Cipla plans to offer Medpro's shareholders about~ USD250m for a 51% stake.. Cipla is offering a price of 10 rands per share, valuing the company at 15 times its reported earnings per share. Medpro is the third-largest firm in South Africa, with the pharmaceutical segment contributing to nearly three-fourths of both sales and EBIT, while its over-the-counter medicine segment contributed to 21% of sales and 16% of PBIT, with others, including animal healthcare, contributing to 6% of sales and 8% of profit. Africa is one of the leading emerging markets in pharmaceuticals.

Our Take

Cipla is a principal supplier of products to Medpro, and we anticipate that the proposed acquisition will strengthen its market position, help in expanding local manufacturing capacity, and expand into other African markets. Its dependence on Cipla makes this transaction advantageous to Cipla. Although positive on the acquisition in the long term, given the challenges in the African market we believe that acquisition won't be substantially accretive in the near term. We also believe that Cipla is unlikely to revise it's offer of 10 rands per share.

Valuation and outlook

We retain our HOLD on the stock with a target Price of INR388 implying a 2% upside. Cipla trades at 18X FY2014e despite offering (1) relatively inferior growth prospects and (2) India finished dosage (50% of revenues) growing at below-market rate since FY2010 although some signs of reversal are visible in last quarter. Cipla has lower than peer average return ratios. ROE's and RoCE's have been depressed relative to the sector standards. Given the operating metrics we find difficult to accord a premium target multiple to the stock. However, the upside risks to our call are 1) Sustained contribution of Lexapro; 2) Greater than USD35-40m contribution from one off opportunities; 3) USFDA approval of Indore SEZ leading to a faster than anticipated ramp up; 4) Inhalers in Europe taking off.

Source : Equity Bulls

Keywords