Hold Cipla Ltd - PINC Result Review

Weak Q1; Growth concerns priced in; Upgrade to Hold

Cipla's Q1FY11 results at 8% sales growth and 1% decline in EBITDA were lower than our estimates. Domestic sales growth continues to be sluggish/below market at 4% (estimate +12%). Export formulations growth at 14% despite a ~6% adverse currency impact is encouraging. EBITDA margins (Ex Tech licensing fees) stood at 22%. A 15% underperformance to CNX Pharma in the last 6 months has made relative valuations (2% discount to the sector) less expensive – though not compelling. We continue to value Cipla at 20x Sept'2011 earnings – on par with the sector and accordingly our target price stands at Rs323. With a 3% upside we Upgrade to Hold.

Muted 4% growth in Indian formulations; Exports strong

India sales underperformed the industry with a 4% growth on the back of divestiture of I-pill (quarterly run rate of Rs80m in sales) and lower sales of certain generic products. Branded generics growth has been at 11% - still lower than the market. Exports formulations growth at 14% despite a 6% adverse currency movement (v/s USD) is encouraging. Flat API exports led to overall 7% growth in exports. Other operating income at Rs524m was up 3% despite a 40% decline in licensing fees.

Margins came off; Current levels sustainable, in our view

EBITDA margins have declined ~215 bps on the back of higher staff costs (250 bps) and RM costs (118 bps) while partly being set-off by lower other costs (150bps). Margins in Q1 have been hit by currency (6% adverse impact v/s USD). We believe that the current margins of 20-21% excluding the tech licensing fees and 24% including the tech fees are sustainable margins.

VALUATIONS AND RECOMMENDATION

We note that consensus estimates for Cipla have declined 8% in the last 6 months driving a 14% and 15% underperformance to the Sensex and CNX pharma Index respectively. We maintain our estimates and continue to value Cipla at 20x Sept'11e (at par with the sector). Our target price stands at Rs323. With a limited 3% upside we upgrade to 'HOLD'.

Source : Equity Bulls

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