Accumulate Cipla - Domestic business pines for booster shots - Elara Capital

• Cipla
• Rating : Accumulate
• Target Price : INR351
• Upside : 12%
• CMP : INR314 (as on 13 August 2010)

Domestic business pines for booster shots

Lacklustre performance continues

Cipla's Q1FY11 performance is below our expectation as the company's sales growth YoY stands at 8% at INR 14.8bn vis-à-vis our estimation of INR15.4bn. The lower single digit growth in domestic formulations is a major cause of worry for the company as it has led to an overall muted growth in Q1FY11. We believe that the higher base in technology income from royalty is another contributor of lacklustre performance of the company.

Capacity expansion unable to stroke domestic growth

The company has faced challenges in the domestic generic segment though its branded business has managed a 10% YoY growth. The management expects the present scenario to change once the impact of the Indore facility and the new product promotions take effect.

ARV revenues return at the cost of operating margins

The company has started supplying ARV drugs to tender business in the African region after a hiatus of 2-3 quarters. The management believes that the current pricing scenario is better than the internal benchmark return of the company. However, it has impacted the operating margin, reducing it by 300bps to 24% in Q1FY11. Cipla has achieved a better growth in the export of anti-asthma to EU and anti-biotic drugs to emerging markets.

Valuation - Waiting for triggers in export markets; Accumulate

The company's higher base in the domestic market and upfront cost in new plants such as the Indore facility could impact near term cash flows. However, Cipla is confident of regaining growth in the domestic market, and expects to boost exports of partner products to the US and EU markets. The stock trades at PE 21x and 18x of FY11 and FY12, respectively. With a 12% upside to our target price INR351, we maintain Accumulate.

Source : Equity Bulls

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