Cipla - Slower growth affects results - Centrum

Cipla's Q4FY13 results were below our expectations. The company reported a growth of 5%YoY in revenues, 60bps drop in EBIDTA margin and 8%YoY decline in net profit. Sales growth in domestic formulation business was 5%YoY vs. industry growth of ~11%. Formulation exports grew by 12%YoY whereas export of API dropped by 24%YoY.Cipla has commenced the supply of Dymista nasal spray to Meda for US and other emerging markets. Cipla Medpro has won a large tender for the supply of ARV products in S. Africa. Medpro acquisition is likely to be finalised in Q2FY14. The company filed 5 ANDAs in FY13 and plans to file 8-10 ANDAs with US FDA in FY14. The management has given a guidance of healthy double digit sales growth in FY14. We have a Buy rating for the scrip and revised target price of Rs526 from earlier target of Rs501 (based on 22x Sept'14 EPS of Rs23.9).

- Lower sales growth: Cipla reported 5%YoY growth in revenues from Rs18.66bn to Rs19.67bn in Q4FY13. Domestic formulation revenues (40% of total) grew by 5%YoY from Rs7.54bn to Rs7.93bn compared to the industry growth of ~11% during the quarter. Its formulation export business (48% of total) grew by 12%YoY from Rs8.55bn to Rs9.54bn. The Export of API business (9% of revenues) declined by 24%YoY from Rs2.30bn to Rs1.75bn.

- Margin declines: Cipla's margin for Q4FY13 dropped by 60bps from 21.4% to 20.8% due to the increase in personnel and other expenses. The company's material cost dropped by 360bps YoY from 41.4% to 37.8% due to the change in product mix with higher formulation exports. Personnel cost increased by 320bps from 9.8% to 13.0% due to the increase in manpower and annual increments. Other expenses were up by 90bps YoY from 27.5% to 28.4% due to the increase in travel expenses.

- Slower growth for major products: As per IMS MAT-March'13 data, Cipla grew at 8.0% against industry growth of 10.1%. Of the ten major brands, two grew at higher than industry growth rate. Cipla's ten major brands contributed 28% to the company revenues. Foracort was the fastest growing brand at 12.7% followed by Budecort at 10.3%. We expect these two major brands to drive future growth in the domestic market.

- Good volume growth from new pricing policy: The management expects good growth in volumes on the implementation of National Pharmaceutical Pricing Policy (NPPP). The company has ~7,500MRs in the domestic market.

- Healthy product pipeline for US: Cipla has a strong product pipeline for the US market. The company has filed 5 ANDAs during FY13 and has plans to file 8-10ANDAs in FY14.

- Valuations: We expect Cipla to benefit from good growth in the domestic, US and S. African markets. The acquisition of Medpro will help to enter other African ountries. At the CMP of Rs368, the stock trades at 16.9x FY14E EPS of Rs21.8 and 14.1x FY15E EPS of Rs26.0. We have revised our FY14 and FY15 estimates downwards by 4% and 1% respectively. We have a Buy rating for the scrip with a revised target price of Rs526 (based on 22x Sept'14 EPS of Rs23.9) with an upside of 42.9% over the CMP.

Source : Equity Bulls

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