Cipla - Lacklustre performance - Accumulate - Elara Capital

• Rating : Accumulate
• Target Price : INR351
• Upside : 12%
• CMP : INR313 (as on 14 May 2010)

Lacklustre performance

No surprises in growth front

Modest growth in exports due to a reduction in API sales, non participation in anti-AIDS tender business, and the rupee appreciation have led to a muted revenue growth 7% in Q4FY10 for the company. Though domestic formulations grew by 10%, in-line with the guidance, we note that the company is unable to induce growth in domestic market despite the addition of capacity and a substantial increase in sales force over the last two years.

Forex rate, tech income, HIV tender took heavy toll on margin

With a policy of natural hedge on exports, sales and sales growth, Cipla remains highly sensitive to the rupee/US dollar rate. The company's income from out-licensing technology and IP assets comes as highly unexpected hence causes a concerns for vulnerability in EBITDA margins. With the intention of not participating in HIV tender business, mainly in Africa, the company has focused on maintaining a better margin. However, this would affect the overall revenue growth.

Inhaler sales maintain flat growth

Cipla's inhaler business has not grown sequentially in Q4FY10 post the launch of two new inhalers in the UK market. While the company targets the USD3bn anti-asthma business, we expect revenue to ramp up from H2FY12 onwards as majority of the MAA applications for inhaler business would be eligible for approvals post clinical trials in EU.

Price correction offers better headroom, upgrade to Accumulate

With an 8% growth in domestic formulations due to the high base effect, Cipla has given 8-10% sales growth guidance for FY11. The management expects the Indore SEZ plant to commence operation in FY11. While production from the Indore plant would increase operational costs, we expect a ramp-up in sales from the site unlikely before H2FY12. We rate the company's guidance uninspiring vis-à-vis its peers. With a price correction post Q4FY10 result, the valuation of the company provides better headroom. We upgrade our recommendation to Accumulate.

Source : Equity Bulls

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