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    Pharmaceuticals May02,2012

    CiplaLtd.

    Bloomberg:CIPLAINReuters:CIPL.BO BUY

    InstitutionalEquities

    IndiaResearch

    INITIATIONREPORT

    Recommendation

    CMP: Rs312

    TargetPrice: Rs375

    Upside(%) 20%

    StockInformationMarketCap.(Rsbn/US$mn) 251/4,753

    52weekHigh/Low(Rs) 360/273

    3mADV(Rsmn/US$mn) 532/10.1

    Beta 0.6

    Sensex/Nifty 17,319/5,248

    Shareoutstanding(mn) 803

    StockPerformance(%)1M 3M 12M YTD

    Absolute 2.3 (10.9) 0.8 (2.5)

    Rel.toSensex 2.8 (11.6) 11.4 (13)

    Performance

    Source:Bloomberg,KarvyInstitutionalResearch

    1YearForwardPEBand

    Source:Bloomberg,KarvyInstitutionalResearch

    AnalystsContactRahulSharma

    022 61844310

    rahul.sharma@karvy.com

    NishithSanghvi022 61844326

    nishith.s@karvy.com

    25 027 029 031033 035 037 0

    15,500

    17,500

    19,500

    Apr11

    Jun11

    Jul11

    Aug11

    Oct11

    Nov11

    Dec11

    Feb

    12

    Mar12

    Apr12

    Sensex(LHS) CIPLA(RHS)

    100

    200

    300

    400

    500

    600

    Apr08

    Apr09

    Apr10

    Apr11

    Apr12

    (Rs) MeanP/E

    15x

    20x

    25x

    30x

    Onanupswing;SustainableGrowthPathSemiurbanThrust,Respiratory&GynaecologytoSustainGrowth:Ciplas

    reach in semiurban / (TierII to TierVI cities) segment is formidable and is

    better than any of its listed peers. Its panIndian presence with 7,000field

    forceand58%portfolioinacutesegmentwillbethemajorgrowthdrivers.Its

    nichetherapeutic segments Respiratory (28%) & Gynaecology(12%) will

    continue to outperform the industry. The Company hasbeen proactive in

    launchesinboththesesegments,whilethepricehikeshavebeenundertaken

    selectivelyinRespiratorysegment.

    Launch of Combination Inhalers Exploring HighMargin Opportunity:

    CiplahaslaunchedfourproductsinseveralEUmarkets,whileitisplanning

    tolaunchfivemorecombinationproductsinnextfiveyears.Webelievethat

    thelaunchofcombinationproductsintheEUmarketswithSeretidelikely

    tobe launched in FY13 is one of the key triggers for Cipla. Our revenue

    assumptions on combination inhalers are above street estimates as we have

    assumedacombinationlaunchinFY13EandFY14Ewhichmaybeariskto

    ourassumption.

    Return Ratios & Asset Turnover to improve due to better utilsation of

    IndoreSEZ:CiplahasspentRs.9bnforitsIndoreSEZ(ISEZ)facility,which

    housesfacilityfororal,topicalinjectablesandothers.Thecompressionofthe

    returnratios

    and

    asset

    turnover

    ratios

    has

    been

    in

    lieu

    of

    ISEZ.

    We

    believe

    that with improving capacity utilisation at the ISEZ plant and maintenance

    capex, the operating leverage will aid the key profitability ratios, going

    forward.

    Outlook&ValuationCiplas domestic formulations are expected to grow in line with the market

    (on a highbase) onback of pricehike in select segments, product launches

    andbetter MR productivity. Launch of combination inhalers in EU willalso

    aid CAGR revenue growth of 14% in FY1114 period. Withbetter operating

    leverage, focus on profitable products and segments, Ciplas profits would

    record 18.5% CAGR in the same period. We initiate coverage on the stock

    with BUYrecommendation with a target price of Rs. 375 per sharebasedon 19xFY14E. Our target price includes Rs. 1.1 coming from Lexapro

    exclusivitysuppliestoTeva.

    KeyFinancials

    Y/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E

    Netsales 56,057 63,194 68,714 81,232 91,878

    EBITDA 13,106 12,709 15,422 19,025 21,920

    NetProfit 9,733 9,497 10,784 13,686 15,802

    EPS(Rs) 12.1 11.8 13.4 17.0 19.7

    EPSgrowth(%) 25.7 2.4 13.6 26.9 15.5

    EBITDAmargin(%) 23.4 20.1 22.4 23.4 23.9

    PER(x) 25.7 26.4 23.2 18.3 15.9

    Source:Company,KarvyInstitutionalResearch

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    May02,2012

    CiplaLtd.

    ShareholdingPattern(%)

    Source:BSE

    RevenueBreakup

    Source:Company

    Promoter,

    36.8

    FII,16.1

    DII,17.2

    Publicand

    Others,29.9

    Domestic,

    46%

    Exports,54%

    CompanyBackground

    Cipla is one of thebiggest players in Indian formulations market

    enjoying5.7%marketshare.KeytherapiesfortheCompanyinthe

    domestic space include: Respiratory, AntiInfectives, Cardiac,

    Gynaecology and GI. The Company has 70% market share inInhaler segment and its key brands in the same segment are:

    Seroflo,Foracort,BudecortandAerocort.

    Intheexportspace,theCompanyhasbeenworkingonalowrisk,

    low margin partnership model, which restricts any marginupside

    intheUS&EU.However,theCompanyisconsciouslychangingits

    policy towards a more profitable model for the same. The

    Company is now focusing on the inhaler opportunity, which is

    expectedtoyieldsignificantprofitability,goingahead.

    The recently commissioned Indore SEZ will be instrumental in

    fulfilling

    Ciplas

    ambitions

    to

    fulfill

    its

    strong

    growth

    projections

    inensuingtimes.

    CompanyFinancialSnapshotProfit&loss

    Y/EMar(Rsmn) FY12E FY13E FY14E

    Netsales 68,714 81,232 91,878

    EBIDTA 15,422 19,025 21,920

    Depreciation 2,966 3,096 3,416

    InterestExpense 134 101 130

    PBT 13,742 17,107 19,753

    Tax 2,958 3,421 3,951

    Adj.PAT 10,784 13,686 15,802

    EPS(Rs) 13.4 17.0 19.7

    ProfitandLossRatios

    EBIDTAMargin% 22.4 23.4 23.9

    AdjNetMargin% 16.0 17.1 17.4

    ValuationMultiples

    P/E(x) 23.2 18.3 15.9

    EV/EBIDTA(x) 15.7 12.5 10.7

    P/S(x) 3.7 3.1 2.8

    CashFlow

    Y/EMar(Rsmn) FY12E FY13E FY14E

    EBIT 12,456 15,929 18,504

    (Inc.)/Decinworkingcapital 609 (5,736) (5,191)

    CashFlowfromOps 13,065 10,194 13,314

    Others (1,550) (3,151) (3,908)

    Capex

    (4,539) (4,400) (5,000)FreeCashFlow 6,977 2,643 4,406

    ChangeinEquity

    ChangeinDebt (2,201) 614 837

    Investments (1,338)

    CFfromFinancing (3,539) 614 837

    ChangeinCash 3,438 3,257 5,242

    BalanceSheet

    Y/EMar(Rsmn) FY12E FY13E FY14E

    TotalAssets 91,203 103,959 117,937

    Netblock 30,983 32,587 34,171

    CWIP 1,800 1,500 1,500

    Investments 7,041 7,041 7,041

    CurrentAssets

    51,379 62,831 75,225

    TotalLiabilities 91,203 103,959 117,937

    Networth 73,760 83,442 94,662

    Debt 2,213 2,827 3,663

    CurrentLiabilities 12,795 15,255 17,216

    DeferredTax 2,435 2,435 2,435

    BalanceSheetRatios

    RoE% 15.8 17.8 18.1

    RoCE% 18.4 20.6 21.0

    Debt/Equity 0.03 0.03 0.04

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    May02,2012

    CiplaLtd.

    Valuation&Recommendation

    Cipla has underperformed its peers in the last quarter mainly due to lower

    performance in the preceding quarter. The stock is trading at reasonable

    valuationsof

    18.5xFY13E

    and

    16.0xFY14E,

    which

    is

    at

    a

    discount

    to

    its

    peers

    by

    15.6% for FY13E and 18.8% for FY14E. We value the corebusiness at 19xFY14E

    withapriceofRs.374(lowerthan1yearforwardmeanmultipleof22.4x)andadd

    Rs.1.1fortheLexaproopportunity.WeinitiatecoverageonthestockwithBUY

    recommendationand a targetpriceofRs. 375 pershare that representsanupside

    of20%fromcurrentlevels.

    Exhibit1:1yearforwardPEBand

    Source:Bloomberg,KarvyInstitutionalResearch

    Exhibit2:ComparativeValuationP/E(x) EV/EBITDA(x) ROCE(%) ROE(%)

    FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E

    SunPharmaceuticalsInds.Ltd. 25.0 24.7 23.8 17.5 16.6 16.2 27.8 25.4 23.5 24.0 20.0 17.9

    Dr.ReddysLaboratories 20.3 19.4 16.9 13.0 12.6 11.0 24.9 20.8 20.9 28.4 24.0 22.8

    RanbaxyLabs N.A 23.0 22.4 14.1 17.9 16.9 N.A 16.0 15.0 N.A 27.2 22.5

    LupinLaboratories 24.7 21.6 18.6 16.6 14.5 12.4 25.8 24.8 24.2 24.6 23.0 22.0

    CadilaHealthcareLtd. 24.8 20.9 17.0 16.2 13.0 10.8 18.5 20.0 21.5 25.4 24.5 25.3

    Cipla 23.2 18.3 15.9 15.7 12.5 10.7 18.4 20.6 21.1 15.8 17.8 18.1

    Source:Company,KarvyInstitutionalResearch

    OurView:

    With

    the

    domestic

    formulations

    growing

    in

    line

    with

    the

    market,

    product rationalization in the exportsmarket,greater scale in Indore SEZ and

    launchofcombinationinhalerintheEUmarketareexpectedtoactastriggersfor

    the stock. We firmly believe that with the better performance on the three

    parametersandlaunchofcombinationinhalersinEU,thediscountwouldshrink

    tosingledigits.

    Absolute&RelativeStockPerformance

    CiplahasoutperformedtheSensex&BSEHealthcareIndexduringNov11Feb12

    on an absolutebasis due to sustained sequential improvement in gross margins

    owing to focus on profitability compared to volume growth. On a relativebasis,

    duringDec11

    Jan12,

    Cipla

    has

    outperformed

    the

    Sensex

    by

    30%

    on

    the

    back

    of

    expected quarterly results for Q3FY12. However, postresults the stock has

    underperformedtheBSEHealthcareIndexduetodeclineinoperatingmarginsin

    Q3FY12comparedtoQ2FY12.

    100

    150

    200

    250

    300350

    400

    450

    500

    550

    Apr08

    Apr09

    Apr10

    Apr11

    Apr12

    (Rs)MeanP/E22.4

    15x

    20x

    25x

    30x

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