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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Pharma Sector - Robust Growth Prospects buy on declines

Pharma companies may put up a strong set of numbers due to robust domestic growth and the global generics opportunity.

The BSE Healthcare index has underperformed the Sensex by about nine percentage points in the September quarter, which is not surprising. As the risk appetite increases among investors, the pharma sector, which is a defensive play, will not do as well as the broader market. However, since March 2009, when the markets were at a low, the pharma index has outperformed the Sensex by 14 percentage points.

According to analysts at Angel Broking, Sun Pharma may post muted sales growth of 2.4 per cent due to lower sales of Protonix, which is now under litigation. On the other hand, Dr Reddy's may surprise positively, as the September 2009 quarter was marred by inventory and goodwill amortisation issues.

Domestic formulations are likely to boost Cipla's top line by 5.5 per cent, but higher wage costs may drag operating profits. Ranbaxy, although struggling with US Food and Drug Administration issues, may see its top line rise two per cent, as Valtrex generics continue driving revenues despite the end of the exclusivity period and competition getting stronger.

Analysts expect Lupin to post 12 per cent growth with strong domestic and US revenues, while Ipca should grow at 14 per cent aided by the anti-malarial segment sales both in India and abroad.

The September quarter saw Sun Pharma completing the Taro acquisition, Ranbaxy getting exclusivity in Aricept and Aurobindo entering into a supply agreement with AstraZeneca. Approvals for generic launches, too, fell in around the same time, with Aurobindo receiving four approvals and Sun winning three.

Going forward, the pharma sector is in good shape. The domestic market is expected to witness 12-15 per cent year-on-year growth, while the global market will grow at five per cent. Being strong contenders in the global generics space, there are tremendous opportunities for Indian pharma companies, as a large number of key drugs will go off-patent over the next five years. Once again, the market has started factoring in the future growth. The healthcare index has gained 5.7 per cent in the past eight trading sessions, while the Sensex has risen just 0.7 per cent.

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Ingenious Investor

Equity Research Division

Ravina Consulting

No.11 AG Plaza

3rd Cross Kamanahalli

BANGALORE 560084

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sowmya@ravinaconsulting.com

Talk / SMS 08105737966

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