Maintain Buy on Cipla - Aggressive capex to continue - Motilal Oswal

Investing in future growth

We attended Cipla's annual general meeting (AGM), at which the management reinforced its focus on investing in future growth and maintaining Cipla's leadership in the pharmaceuticals space.

Highlights of the AGM

- FY11 topline to cross Rs60b, aggressive capex to continue

The management has given topline guidance of over Rs60b for FY11, representing growth of more than 7% over FY10. Cipla indicated it would invest Rs10b in the near future to build manufacturing facilities and expand existing ones to keep abreast of development and maintain its leading position in the pharmaceuticals space.

- Focus on bottom-line, foray into biotechnology

Cipla's management said it was focussing on improving profitability. Cipla is targeting profitability improvement through backward integration and focussing on more complex and low competition areas like biotechnology. Cipla will invest US$65m in biotechnology ventures over three years and is likely to sell the products in India by early 2012.

- CFC-free inhalers a key long-term trigger

The launch of CFC-free inhalers in the EU and the US is a key long-term trigger for Cipla. It is developing eight inhalers and has the third largest inhaler manufacturing capacity in the world.

Key takeaways from the annual report

- The pharmaceutical industry may face consolidation as multinationals move to buy out Indian pharmaceutical businesses and major players try to extend their reach to emerging rural markets.

- Cipla generated its highest ever free cashflows this year after posting negative free cashflows over the past five years (FY05-09).

Valuation and view

We believe Cipla has one of the strongest generic pipelines among Indian companies. We believe Cipla's CFC-free inhaler pipeline is likely to gradually be commercialized in Europe and upsides from high-margin opportunities like Seretide can come through over the next two years (our estimates do not include these upsides).

Its manufacturing infrastructure, strong chemistry skills and huge inhaler capacity make it a partner of choice for MNCs that are ramping up generics and their presence in emerging markets. Besides, its low-risk strategy and strong capex should ensure good long-term potential.

We expect Cipla to post EPS of Rs14.2 in FY11 and Rs16.9 in FY12, leading to 16% CAGR over FY10-12. Cipla is valued at 21.4x FY11E and 17.9x FY12E earnings. Maintain Buy.

Source : Equity Bulls

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