Accumulate Cipla - Sushil Finance

Healthy Domestic market recovery with focus on chronic segments coupled with increasing rural presence & MR productivity

Within India, Cipla is a dominant player & enjoys a very strong foothold with chemists and doctors alike and has one of the biggest brand portfolio supported by a field force of ~7,500 MRs. This business which contributed ~45% of its overall revenues (FY12) registered a growth of 14% in FY12 after witnessing muted growth for 2 consecutive years. Going forward this business is expected to be a key earnings driver with the management guiding for a 15%+ YoY growth in FY13E (9MFY13 growth @ 17.4%) and 14-15% growth in FY14E. With limited addition plans to its current MR strength of 7,500, the focus would be on increasing its MR productivity & its already strong semi urban/rural presence and consistently launching new products (+25/year). We have thereby factored in a 14.5% CAGR between FY12-15E in its domestic formulation business.

Export business at an inflection point with multiple triggers like Dymista (US) ramp up, EU inhaler launch & new ARV tender supplies to SA

Cipla has a global presence in over 170 countries including the US, Europe, South Africa, Australia and the Middle East through exports and strategic alliances. Cipla's strategy for regulated markets is built around supply tie-ups with global players; however, we believe the USFDA approval (received in Q2FY13) for its Indore SEZ plant will facilitate its entry in the US as it now plans to have a front end presence in the US market (5 ANDAs filed on its own). Also, with the initiation of Dymista supplies from Cipla (manufacturing partner for Meda) to Meda for distribution in the US market in Sept 2012 (factored in potential Sales of $7/$26 mn in FY13E/14E) coupled with expected EU launch of Seretide/Advair in Sept 2013 with Neolab (Factored in potential Sales of $23/$52 mn in FY14E/15E) and initiation of new ARV tender ($ 160 mn over 2 yrs) to supply HIV/AIDS drugs to public hospitals in South Africa, we believe Cipla's export business will continue to demonstrate strong growth of 12.6% CAGR between FY12-15E.

Limited CAPEX plans going forward coupled with healthy balance sheet & strong operating cash flows

Cipla invested ~Rs. 9 bn for its Indore SEZ project and over the last 2 years faced pressure on its operating earnings due to the facility, even though being commissioned, was awaiting site approvals from various regulatory agencies across different countries. However, with the facility now being USFDA approved coupled with no further significant capex plans at least for the next 2 yrs, we believe a potential pick up in its asset turnover ratio is on the cards. With ramp up in sales from SEZ & a pick up in Dymista supplies, operating leverage would come in, thereby improving the margins (excluding Lexapro) going ahead. Also, Cipla has always been a very low leveraged company and has been able to build a substantial cash reserve giving it enough room to fund its entire capex plans through internal accruals or raise debt going forward to fund its expansion plans if required.

OUTLOOK & VALUATION

With the transition being seen in the domestic business (9MFY13 growth @ 17.4%) coupled with sizeable opportunity from high margin products in US (Ramp up in Dymista Supply to Meda) + monetization of Seretide inhaler in the EU market (launch Sept 2013) + new ARV tender supplies to SA partner, we believe, Cipla could conservatively grow its sales & earnings at a health pace of 13.3% & 15.9% CAGR over FY12-15E. Further with potential pick up in asset turnover (ramp up in Indore SEZ) & a healthy balance sheet with strong cash generation ability, we initiate coverage on Cipla with an ACCUMULATE rating with a target price of Rs. 443 (20x FY15E EPS of Rs. 22.2).

Source : Equity Bulls

Keywords