Cipla - 4QFY13 Margin Pressure May Extend To FY14E - Nirmal Bang

Cipla's 4QFY13E earnings disappointed on all operating parameters - Revenue/EBITDA/PAT was 4%/12%/18% below our estimates and 7%/22%/30% below consensus. Despite improvement in gross margins, higher staff costs and other expenses stressed margins, which were 188bps/381bps below our/consensus estimates. We believe the implementation of the new pharma pricing policy, commencement of low margin Anti-Retroviral or ARV tenders in Cipla Medpro, higher R&D spends and investments in front end set-ups- where expenses are front-loaded - will continue to pressurize Cipla's margins in the near term and accordingly cut our EPS estimates for FY14E/FY15E by 13%/9%, respectively. Mitigating impact from ramp-up in high margin products like Dymista is likely only in FY15E. We cut our target price to Rs422 (from Rs463 earlier), and downgrade our rating from Buy to Hold.

Performance below expectations: Cipla posted lower-than-expected earnings of Rs2.7bn as against our/consensus estimate of Rs3.3bn/3.8bn, respectively. Revenue growth moderated to 5%YoY, 4%/7% lower than our our/consensus estimates, due to a) muted 5% growth in domestic business (de-growth in generic-generic business; branded generic business grew by 11%), b) 24% decline in API exports and c) deferment of certain anti-malarial tenders in African market. EBITDA margin stood at 20.8%, substantially lower than our/consensus estimate of 22.7%/24.6%,respectively. While gross margins improved YoY as well as QoQ, there was a sharp increase in staff costs due to annual increment and increased manpower (7,500 medical representatives currently). Additionally, there was also a sharp rise in interest costs (up 2x QoQ due to additional working capital debt) as well as tax rate (28% of PBT as against normalized run-rate of 25%), which led to an 8%YoY decline in PAT, despite a forex gain of Rs180mn.

Concall highlights: 1) Cipla management guided for healthy double digit revenue growth (our estimate is 13% for FY14E), capex of Rs4bn in FY14E, increase in R&D costs to the tune of 50-100bps and tax rate of 25% 2) The company has outstanding hedges of US$210mn 3) Cipla expects to file for 8-10 ANDA's in FY14E as against 5 ANDA's filed in FY13 4) The company is evaluating options to set-up front ends in markets like US, Europe, Brazil, Turkey, Russia.

FY14E/FY15E EPS cut by 13/9%: We incorporate the impact of Cipla Medpro acquisition in our numbers (EPS neutral in FY14E, adds 3% to FY15E EPS) and cut our margin estimates by 292bps/243bps for FY14E/FY15E, respectively, which consequently leads to a 13%/9% fall in FY14E/FY15E EPS estimates. Accordingly, our TP stands revised downwards to Rs422 (from Rs463 earlier), valuing the stock at 19xFY15E EPS of Rs22.2. We have retained our Hold rating on the stock.

Source : Equity Bulls

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