Saturday, August 13, 2011

Cipla Buy

Cipla is India’s third largest company by domestic sales. Cipla’s revenues (excluding tech fees) and profits have posted 17% and 13% CAGR in FY06-10, to Rs. 65 bn and Rs. 12 bn in FY10 respectively. Cipla’s domestic formulations contribute 46% to total FY10 revenues (excluding tech fees) and have posted 14% CAGR in FY06-10. With a market share of ~5%, Cipla is the third largest player in the Indian market, with leadership positions in ARTs, respiratory and urology. Cipla’s export sales (excluding tech fees) have grown at 22% CAGR during FY06-10, to Rs. 28 bn, in FY10. Africa, with 34% share, is the largest contributor to exports, followed by the Americas (26%) and Europe (17%).

India is projected to be the third-largest pharma market (after the US and China) in terms of incremental growth. It is also evident that the sub-continent, with the highest population and robust economic growth, offers attractive return to pharma companies due to its cost effective manufacturing capabilities and branded generics nature of the market. As the domestic pharma market grows in size and diversity, there are several opportunities that will scale up to their full potential. Some of these include biologics and vaccines, consumer healthcare, patented products and hospital segment, which are at an early stage of lifecycle, but are likely to scale up with upgradation of therapies, increased penetration of multi-specialty hospitals and changes in patients preference. According to industry sources, these opportunities will collectively grow to USD 25 bn by 2020 from the current USD 5 bn.

Cipla’s domestic operations are its strength, offering it strong, steady cash flows to sustain operations. With a market share of ~5%, Cipla is the third largest player in the Indian market. It is the leader in ARTs, respiratory and urology segments. Domestic formulations contributed 46% to FY10 overall revenues and accounted for 34% of the incremental growth during FY05-09. We expect Cipla gross sales to grow at 15% CAGR to Rs. 85 bn by FY13E, led by 16- 17% CAGR in domestic branded formulation and export formulations business to Rs. 38 bn and Rs. 37 bn, respectively.

Cipla’s valuations over the past three months have declined to 16-17x, from historical five year average of 19-20x due to poor operating performance. We believe the expected turnaround in domestic business, sustainable licensing income and ramp up in Indore SEZ should drive 22% earnings CAGR over FY11-13E. Inhaler exports to EU and ROW markets will be long-term growth drivers. Hence, we believe de-rating factors have now become re-rating triggers.

The performance of the company during the last 1 year is given below.

Time Span Price Change %Change
Today 293.25 -0.55 -0.18
Week 308.40 -14.60 -4.73
Month 323.25 -29.45 -9.11
Three Months 307.00 -13.20 -4.29
Six Months 312.30 -18.50 -5.92
One Year 313.75 -19.95 -6.35

With all other sectors beating retreat investors should look defensive bets within the FMCG and Pharma space for capital protection and long term gains. Buy around 280 levels as this is the support level and target for a price of over Rs.350 in next 3-4 months.

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Ravina Consulting
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