Cipla Limited - Disappointing performance; Catalysts look far away - Antique

In line with our view that impressive performance in the 1HFY13 will not be sustainable, Cipla has returned to trend line annualized growth of 11-12% in 2HFY13. This has been the second consecutive quarter of disappointing operational numbers driven by weakness in both export and domestic markets. Catalysts like Indore SEZ ramp-up, Inhaler off take in developed export markets primarily Europe and Cipla Medpro acquisitions look atleast 6-12 months out. Revenues, EBITDA & PAT were below our estimates by 6%, 20% and 22%. The weakness was driven by lackluster export performance, subdued domestic market growth and margins tapering off because of discontinuation of Lexapro.

Reducing estimates

We reduce our estimates for FY14 & FY15 by 3% and 4% respectively & retain our HOLD on the stock with a target Price of INR390 implying a 3% downside from the current levels valuing the stock at 17X FY15 EPS. We believe that this multiple is justified on back of (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. Upside risks to our call are 1) Sustained contribution of Lexapro.2) Greater than 35-40mn$ contribution from Dymista.3) U.S FDA approval of Indore SEZ leading to a faster than anticipated ramp up.

Source : Equity Bulls

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