Cipla Ltd 120502 Karvy

7/31/2019 Cipla Ltd 120502 Karvy

1/20

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


AnalystsContactRahulSharma

022 61844310

[email protected]

NishithSanghvi022 61844326

[email protected]

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


2/20

2

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


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


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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3

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


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


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


4/20

4

May02,2012

CiplaLtd.

Exhibit3:AbsolutePerf.FromApril2011

Source: Bloomberg,KarvyInstitutionalResearch

Exhibit4:RelativePerf.FromApril2011


Exhibit5:AbsolutePerf.FromApril2011


xhibit6:RelativePerf.FromApril2011


ThestockhasgivenlowerreturnsfromMar11incomparisontoitspeersi.e.Sun

Pharma, Lupin and Dr. Reddys Labs (DRL), who benefitted from the

opportunities in the US market, while Cipla with its partnership model has not

seen any major upside. Commercialization of Indore SEZ and the consequent

impactoffixedoverheadshavealsonegativelyimpactedmarginperformance.

Ciplasperformancehasbeenlowerthanitspeers,ithasoutperformedtheSensex

return 6.7% and underperformed the BSE Healthcare Indexby 6%, the stock has

given 5.9% returns over the last 6 month on absolutebasis. However, on last 3

monthbasis, the stock has given negative returns of 10.9%, while the Sensex andBSEHealthcareIndexhavegiven0.3%and8.3%returns,respectively.

Our View: The underperformance can be attributed to lowerthananticipated

quarterlyresults.Onarelativebasis,thestockhasoutperformedtheSensexwhile

continuestounderperformtheBSEHC.

Exhibit7:StockPricePerformanceAbsoluteReturns(%) RelativetoSensexReturns(%)

1m 3m 6m 12m 1m 3m 6m 12m

Sensex (1.4) 0.3 (0.8) (12.6)

BSEHCIndex 4.4 8.3 11.9 9.5 5.8 8.0 12.7 22.1

Cipla 2.3 (10.9) 5.9 0.8 2.8 (11.6) 6.6 11.4


80

90

100

110

120

Apr11

May11

Jun11

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan12

Feb12

Mar12

SensexIndex Cipla BSEHCIndex

95

100105

110

115120

125

130

135

140

Apr11

May11

Jun11

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan12

Feb12

Mar12

SensexIndex Cipla BSEHCIndex

70

120

170

Apr11

May11

Jun11

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan12

Feb12

Mar12

SensexIndex Cipla SunPharma

Lupin Dr

Reddy Cadila

80

90

100

110

120

130

140

150

Apr11

May11

Jun11

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan12

Feb12

Mar12

SensexIndex Cipla SunPharma

Lupin DrReddy Cadila

BSEHCIndex


5/20

5

May02,2012

CiplaLtd.

InvestmentRationale

Ourinvestmentthesisisbasedonthefollowingpremises:

HygieneFactorsinPlaceExpectSustainableGrowthinDomesticBiz

SemiUrbanThrusttoDriveGrowthoverNextTwoYears

Respiratory & Gynaecology Key Therapeutic Segments to Sustain StrongGrowth

FieldForceProductivityInlineWithPeersFurtherImprovementisLikely

DeriskedPartnershipModelRenegotiationsofExistingContractsforBetterReturn

Regulatorycompliant Facilities With No Overhang Renegotiation ofContractsisLikely

SupplyExclusivitytoTeva&AkorntoBoostConfidence

Launch of Combination Inhalers Exploring LowCompetition & HighMarginOpportunity

1.HygieneFactorsinPlaceExpectSustainableGrowth

inDomesticBizCiplas domestic business constitutes 47% of its total revenues. Currently, the

Company commands 5.7% market share (as per AIOCD AWACS) in domestic

pharmaceuticalspace.ItsdomesticbusinesshasgrownataCAGRof10%overthe

lastfiveyears.Ciplahasastrongfranchiseindomesticformulationsspacewitha

formidable position in the respiratory segment and diversified portfolio mix. Its

45%

of

domestic

revenues

come

from

Tier

II

to

Tier

VI

towns.

OurView:WebelieveCiplawillgrowmorethanmarketratesoverthenexttwo

yearsgiventhe7,000strongfieldforceandstrongpanIndiafranchise.

Ciplahasbeenavolumedrivencompanywithhighproportionofacuteproducts

in its portfolio. The acute products contribute 59% of the domestic formulations

sales of Cipla. It has been Ciplas practice to dole out higher bonus in acute

segment to exploit retailers discretionary sales techniques. Bonus doleout has

been high in antiinfectives space (24% of portfolio) and gynaecology (13% of

portfolio).

OurView:Thehighproportionofbonusaspercentageofsaleshasbeenthepolicy

ofthe

Company,

which

we

believe

will

continue

going

ahead.

Ciplas

MAT

growth

recordedintheacutespacehasbeen11.0%,whilethechronicgrowthhasbeenat

17.5%inMar12.Weexpect13.3%growthinFY13Eand13.4%growthinFY14Ein

domesticformulationsbusinessincludinggenerics.

2. SemiUrban Thrust to Drive Growth over Next Two

Years

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

andbetterthanitslistedpeers.Itspenetrationinsemiurbanmarketisthehighest

amongst its domestic peers with stronger growth rates. Given the increased

disposable incomes in semiurban population and unpenetrated nature of the

market,webelievethatthissegmentwillshowhigherrevenuesgoingahead.

MarketShare

Source:AIOCD,AWACS

BonusPercentage

Source:AIOCD,AWACS

BreakupofGrowth

Source:AIOCD,AWACS

4.5

5.0

5.5

6.0

Mar11

May11

Jul11

Sep11

Nov11

Jan12

Mar12

(%)

8.0

8.5

9.0

9.5

10.0

10.5

11.0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jun10

Aug10

O

ct10

D

ec10

F

eb

11

A

pr11

Jun11

Aug11

O

ct11

D

ec11

F

eb

12

(inmn) (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

TotalGR VolGR Pri ceGR NPGR

(%)


6/20

6

May02,2012

CiplaLtd.

Exhibit8:DistributionofRevenues&GrowthinSemiUrbanSegment(YTD)%ofdomesticrevenuescomingfromsemiurbanmarkets Growth(in%9MFY12)

Cipla 45% 20%

Source:KarvyInstitutionalResearch,Company

Wehavefactoredingrowthforthedomesticspacemainlycomingfromthesemiurban markets. While webelieve the urban markets will grow in single digits as

thepenetrationhasbeenhigh,thegrowthinthesemiurbanspacewillcontinueto

bemaintainedat20%goingahead.

Exhibit9:BreakupofDomesticFormulations(Rs.mn)FY10 FY11 FY12E FY13E FY14E

UrbanMarketbreakup 11,739 13,148 14,537 15,529 16,507

GrowthYoY(%) 11 7 6

Semiurbanmarketbreakup 9,605 10,758 12,909 15,491 18,589

GrowthYoY(%) 20 20 20

Source:Karvy

Institutional

Research

OurView:CiplassemiurbansegmentwouldgrowfromRs.9.6bninFY10toRs.

18.6bn inFY14E,asstrongfieldforce,panIndiapresence,andunderpenetrated

nature of the market with a higher proportion of acute products will boost

growth.

3. Respiratory & Gynaecology Key Therapeutic

SegmentstoSustainStrongGrowth

Ciplas80%ofdomesticrevenuescomesfromTop5therapeuticsegments.Asper

AIOCD, AWACS data, its segmentwise market share in the key therapies stands

at: Respiratory (19.4%), Antiinfectives (7.0%), Cardiac (5.4%), Gynaecology

(10.1%)andGI(3.6%)inMar12.

OurView:RespiratoryandGynaecologycontribute29%and13%respectivelyto

Ciplasdomesticbusiness.TheCAGRgrowthforboththesetherapeuticsegments

isexpectedtobeover12%betweenFY10FY14E.

Exhibit10:TherapywiseBreakupofDomesticFormulations(Rs.mn)DomesticBiz(%) FY10 FY11 FY12E FY13E FY14E CAGR(%)

Respiratory 28 5,956 6,701 7,841 9,174 10,733 15.9

YoY(%) 9 13 17 17 17

AntiInfectives

19.9

4,316 4,764 5,097 5,454 5,836 7.8

YoY(%) 16 10 7 7 7

Cardiac 12.2 2,662 2,929 3,368 3,873 4,454 13.7

YoY(%) 3 10 15 15 15

Gynecological 11.8 2,284 2,826 3,334 3,834 4,410 17.9

YoY(%) 48 24 18 15 15

GastroIntestinal 7.3 1,627 1,752 1,962 2,198 2,461 10.9

YoY(%) 12 8 12 12 12


Cipla hasbeen witnessing a rampup in growth in Respiratory, Cardiac and GI

portfolio from FY10 to FY12. While high growth has been witnessed in

Gynaecologyportfoliooverlasttwoyears,intherespiratoryspacethegrowthfor

FY12hasbeenat17.8%whichishigherthanindustrygrowthof14.2%mainlyon


7/20

7

May02,2012

CiplaLtd.

accountoftheinhalersegment.TheGynaecologysegmenthasgrownby18.2%for

FY12periodwhichishigherindustrygrowthof15.1%.

Exhibit11:KeyTherapiesSegmentRespiratory&GynaecologyReportingHigherthantheindustryGrowth(in%) Cipla Industry

SUPERGROUP %ofSales FY12 Q4FY12 Mar12 FY12 Q4FY12 Mar12

Respiratory 28 17.8 23.1 23.6 14.2 15.3 17.3

AntiInfectives 19.9 6.7 9.3 12.4 11.1 14.6 18.3

Cardiac 12.2 15.5 17.5 15.6 20.7 22.2 24.3

Gynecological 11.8 18.2 19.3 8.0 15.1 16.9 15.7

GastroIntestinal 7.3 13.3 23.1 24.2 13.3 17.3 20.0

Source:CompanyandAIOCD,KarvyInstitutionalResearch

Ciplas outperformance in Respiratory segment can be attributed to strong

performance in inhalers segment, while the Gynaecology segment has witnessed

outperformance due to the push given to the oral contraceptive market. Ciplas

brandequityintheInhalersegmenthasbeenquiteformidable,andtheCompany

is

confident

to

maintain

its

market

share

despite

more

competition

from

Sun

Pharma&Lupin.

Exhibit12:KeyProductsTherapy DomesticBusiness(%) PriceHike(%)

Seroflo Respiratory 3.7 10

Aerocort Respiratory 2.7 4

Foracort Respiratory 3.4 14

Misoprost Gynaecology 1.7 19

Source:AIOCD,KarvyInstitutionalResearch

It

is

to

be

noted

that

Cipla

has

not

taken

any

price

hike

in

MTP

segment,

while

the

CompanyisalsolaunchingproductsonaregularbasisinRespiratorysegment.

OurView:Thegrowth in the respiratoryproductswillbedrivenbypricehikes

(due toCiplas lion share in the segment),while thegrowth inGynaecology is

largelyvolumedriven.

Exhibit13:NewProductLaunchesCategoryFY11 FY10 FY09 FY08

Respiratory 5 4 3 5


ThekeyproductsintheRespiratory&Gynaecologysegmentshavewitnessedrise

inmarketshareoverthelastoneyearonMATbasis(Exhibit14).Tractionhasbeenbetter in theboth these segments for Mar12 and 3M Mar12 compared to 12M

FY12.

Our View: With all the products amongst the Top10 and rampup in new

launches,wecontinuetobelievethattheRespiratoryportfoliowillsee17%YoY

growthinnexttwoyears,whiletheGynaecologysegmentislikelytowitness12%

YoYgrowthaidedbyhigherbonuses.


8/20

8

May02,2012

CiplaLtd.

Exhibit14:KeyProductsinRespiratory&GynaecologySegmentMATValueMarketShare(%) WithoutBonusgrowth

Brand Supergroup MATMar11 MATMar12 Q4FY12YoY(%) FY12YoY(%) Mar12YoY(%) INNLEM

CiplaTotal

Seroflo

Respiratory

3.7

3.7

16.7 11.0 15.2 NOAsthalin Respiratory 4.7 4.7 14.9 13.1 12.9 YES

Foracort Respiratory 3.0 3.4 31.8 26.1 31.4 NO

Aerocort Respiratory 2.8 2.7 11.5 12.6 13.6 YES

Budecort Respiratory 2.2 2.3 33.1 17.6 39.1 NO

MTPKit

Mtprost

Gynaecology

Gynaecology

3.2

1.6

3.7

1.7

21.2

11.0

14.0

24.1

(31.2)

24.6

YES

YES

Source:AIOCD,Company,KarvyInstitutionalResearch

Seroflo,ForacortandBudecortdontfigureinNLEMlist.OutofTop10products,

eight products belong to Respiratory & Gynaecology segment. Novamox

(Amoxycillin)CiplasoldergenerationantiinfectiveproductinTop10products

is

showing

single

digit

growth.

Exhibit15:Top10ProductsBrand Supergroup Mar12(Rsmn) FY12YoY(%)

CiplaTotal 32,897 13.3

Seroflo Respiratory 1,205 11.0

MTPKit Gynecological 1,218 14.0

Foracort Respiratory 1,110 26.1

Asthalin Respiratory 1,536 13.1

Novamox AntiInfectives 1,000 8.3

Aerocort Respiratory 903 12.6

MTPill Gynecological 776 (1.2)

Budecort Respiratory 747 17.6

Ciplox Derma 670 0.1Mtprost Gynecological 561 24.1

Source:AIOCD,AWACS

OurView:CiplaislikelytosustainhighergrowthinRespiratory&Gynaecology

segmentsowingto latentdemand,pricehikesandbonusdoleout,whileregular

productintroductionsareexpectedtoaidgrowth.ThegrowthinCAGRforthese

therapiesisexpectedtobeupwardsof12%betweenFY10FY14E.

4. FieldForce Productivity Inline With Peers Further

ImprovementisLikely

The productivity of Medical Representatives (MRs) at Cipla as on FY11 stood atRs.3.4mn/MR,whichisinlinewithLupin(Rs.3.5mn),Dr.Reddys(Rs.3.1mn)

and Cadila (Rs. 3.7 mn) exbiochem. Cipla has around 15 marketing divisions in

Indiawithnearly7,000MRs.

Exhibit16:CompanywiseMRProductivityChartMRs FY11sales(Rsmn) Productivity

SunPharma 2,900 23,801 8.2

Dr.ReddysLabs 3,800 11,690 3.1

Lupin 4,500 15,509 3.5

Cadila 4,500* 16,471 3.7

Source:

Company,

Karvy

Institutional

Research;

Note:

*ex

Biochem

Despite 45% of the revenues coming from the semiurban market, Ciplas

productivity hasbeen inline with the industry due to itsbrand value and scale.


9/20

9

May02,2012

CiplaLtd.

Cipla has announced the closure of two marketing divisions i.e. Protec &

Omnicare with contractual MRs. It has deployed its own workforce inboth these

divisionsforwhichthenumberofMRshasrisento7,000from6,000earlier.

Exhibit17:DomesticFormulationRs.mn FY07 FY08 FY09 FY10 FY11 FY12E FY13E

MRstrength 3,000 3,300 4,600 6,000 7,000 7,000 7,000

DomesticBrandedBusiness 14,898 16,888 19,371 21,344 23,951 27,446 31,020

Newproductlaunches 14 23 31 32 28 30+ 30+

MRproductivity 4.9 5.1 4.2 3.6 3.4 3.9 4.4

Source:KarvyInstitutionalResearch,Company

OurView:Ciplahasrampedupitsfieldforceinthelasttwoyears,withclosure

of two marketing divisions having contractual MRs. With the marketing

investment completed and the contribution of new MRs, we believe that the

CompanysproductivityperMRisallsettoincreasefurther.

5. Derisked Partnership Model Renegotiations of

ExistingContractsforBetterReturn

Ciplas currently has 51% of revenues coming from its international markets. Its

export revenues rose at a CAGR of 14% in FY0711 period. As per partnership

model, the Company develops, manufactures and supplies products, while its

partnerisresponsibleforregulatoryfilings,legalandmarketingofproductsfor7

10yearsandrenewablethereafter.Ciplasexportbusinessisalowriskandstrong

cashflow generator. The Company is renegotiating products and partnerships,

whicharenotmeetingtheCompanysbenchmarkofprofitability.

Exhibit

18:Region

wise

Key

Partnerships

KeyGeographies Partners Revenues(USDmn)

US Teva,Sandoz,Watson,Akorn(22partners) 170

EU Ratiopharm,Hexal,Stada,Neolabs(60partners) 103

Africa Medpro 310

Australasia Sigma 88

MiddleEast 66


OurView:TheCompanysstrategyfor internationalmarketsandfocus togeta

better product mix would yield significant returns, going ahead. We believe

garneringstrong

market

share

in

the

launched

products

will

not

be

difficult

for

the

companygiventhestrongprofileofitspartners.

6. Regulatorycompliant Facilities With No Overhang

RenegotiationofContractsisLikely

Cipla has seventeen facilities, which havebeen certifiedby all major regulatory

agencies. Unlike its peers in the space i.e. Aurobindo Pharma, Claris, Cadila

DRL,Sun Pharma and Ranbaxy who have been pulledup by the US FDA at

variouspointsintime,Ciplahasneverfacedanyimportalertsofar.

OurView:StrongfocusonqualityhasbeenoneofthebiggeststrengthofCipla,

whichinspires

greater

confidence

in

global

generics

market.


10/20

10

May02,2012

CiplaLtd.

7. Supply Exclusivity to Teva & Akorn to Boost

Confidence

Olanzapine & Escitalopram to Teva: Cipla has started supplying Olanzapine

(marketsize

US$3.3

bn)

and

Lexapro

(Escitalopram

with

US$2.9

bn

market

size)

to

Teva during exclusivity period. Olanzapine exclusive supplies for Teva have

begun from Nov11 and will last till Apr12. Lexapro is a CNS drug having three

playersi.e.Mylan,Tevaandtheinnovatorduringtheexclusivityperiod.

OurView: InLexapro,Cipla is likely togenerateUS$46mn revenuesduring the

exclusivityperiodbasedon60%priceerosionand40%marketshareforTeva

anda20%shareofCiplaintherevenues.WehavefactoredanEPSupsideofRs

1.1duringtheexclusivityperiodforLexapro.

Oral Vancomycin to Akorn: Cipla has also started supplying oral Vanocin

(VancomycinwithUS$328mnmarketsize)toAkorn.Itsignedanagreementwith

Akornin

Mar06,

under

which

it

would

manufacture

and

supply

Vanocin,

while

the latter will file the ANDAs and market the same afterwards. In oral Vanocin

space,therearethreeplayersi.e.StridesArcolab,AkornandWatson,andwehave

assumedstaggeredcompetitioninthisproduct.

OurView:Cipla is likely togenerateUS$20mn revenuesfromoralVanocin in

FY13E based on 50%price erosionand 30%market share.Wehavefactored in

US$9mnrevenuescominginforFY14E.

Filings of Lowcompetition Opportunities in US, Marginupside is Likely: Cipla

has DMF filings of key products with more than US$500 mn revenues, which are

expected to have less thanfive players.The Company may getbetter commercial

terms

with

their

partners

for

the

same.

Key

opportunities

expected

to

pan

out

for

theCompanyoverthenextfouryearsareasunder:

Exhibit19:OpportunitieswithDMFFilingDates&MarketSizesCY12 CY13 CY14 CY15

Rosiglitazone(Apr05)(US$680mn)Dutasteride(May09)

($972mn)

MometasoneFuroate

(Dec07)($1.2bn)Albuterol(Jun03)($1.3bn)

Lamivudine/Zidovudine(Sept08)($200mn) Fluticasone(Dec01)($855mn)

Raloxifene(Jan07)($1.3bn)

Finasteride(Sept04)($447mn)

Budesonide/Formoterol(Apr07)($2.8bn)

Source:KarvyInstitutionalResearch

OurView:Renegotiations of existing contracts ispossible in caseDMF/ANDA

filings of big products expected to pan out (can get higher margin from its

partners)&leanerhistorywiththeregulatoryagenciesofthedevelopedmarkets.

Challenges Ahead in AntiRetroviral Segment: In AntiRetroviral (ARV) space,

Cipla is amongst the largest suppliers under the WHO & PEPFAR HIV/AIDS

programwhichisgettingextensivelypricecompetitive.

Exhibit20:OneoftheBiggestPlayersinAntiRetroviralSpaceFinal/TentativeApproval

AurobindoPharma 33

Matrix 28

Cipla 23



11/20

11

May02,2012

CiplaLtd.

Aurobindo Pharma is the major Indian player in the ARV space with the

maximumnumberoffilings.

Exhibit21:AntiRetroviralRevenueMix(US$mn) FY11 FY12E FY13E FY14E

Tender 106 106 85 68

NonTender 71 71 85 102


OurView:Ciplas revenuesfrom lowyielding tenderbusinesswilldeclinefrom

US$106mn inFY11 toUS$68mn inFY14E. It derives 13% revenuesfromARV

segment,whichislikelytodecline,asitplanstofocusonlyonprofitablebusiness.

Supply Contracts for Inhalers Likely: Cipla has the third largest inhalers

manufacturing capacity in the world. Its Management has indicated that the

Company is in talks with several global players to access to various markets and

providethembettercommercialstermsforapossiblealliance.

Our View: With expertise in inhaler manufacturing at regulatorycomplied

facilities and companys strength in drugdeliverymodes in the inhaler space,

Ciplasmarginsareexpectedtobeaccretiveforthisbusiness.

8. Launch of Combination Inhalers Exploring Low

Competition&HighMarginOpportunity

Cipla has launched four products in several EU markets, as elucidatedbelow.

Combination inhaler i.e. Seretide (from GSK with US$1.6bn marketsize in EU)

maybe launched in FY13E. Symbicort(havingUS$1.4bn marketsize inEU)may

belaunchedinnearfuture.

We have factored in the launch of a combination inhaler FY13E (full year) and

another launch in FY14E (full year). We expect revenues to grow rapidly, as the

Companyspartnerwillbeabletogarneratleast20%marketsharefromthesame,

asitisexpectedtobealowcompetitionopportunity.

ContributionofInhalersspacetogrowmorethandoubleto27%inFY14E:Cipla

istheoneofthelargestmanufacturersofinhalersglobally.TheCompanyhasbeen

abletomonetizethefollowingopportunitiesintheinhalerspace.

Exhibit22:EUProductOpportunitiesProducts Country

Budesonide Germany,Portugal

SalbutamolMDI Denmark,UK,Portugal

BeclomethasoneDipropionate Portugal

SalmeterolMDI UK,Germany,Ireland,Poland



12/20

12

May02,2012

CiplaLtd.

KeyFinancials

1.RevenuestoGrowCAGRof14%inFY11FY14EPeriod

Ciplasrevenues

have

grown

by

22.7%

during

FY07

FY11

period

on

back

of

strong

growth in its export formulations front, while the domesticbusiness recorded

12.6%CAGRgrowth.Webelievethattherevenueswouldgrowby14%CAGRin

FY1114Eperiodduetocontinuedtractionindomesticformulationsandlaunchof

combinationinhalersintheEUmarkets.

Exhibit23:Keyassumptionsforrevenues(Rs.mn) FY12E FY13E FY14E Assumptions

Domestic 32,290 36,590 41,501

GrowthinBrandedgenericat13%while

ingenericgenericat15%forFY13and

FY14.

IndoreSEZ 7,000 10,000 13,000 Rampupexpected

ARV 8,289 8,127 8,127

DegrowthinlowermarginTender

businessby20%forFY13&FY14;non

tenderbusinessreportinggrowthof20%

forFY13&FY14

Inhalers 3,980 6,562 8,648launchofonecombinationproductin

FY13andonemoreinFY14inEU

Antimalarials 4,158 5,096 6,116 Growthat20%forFY13&FY14.

Otherexport

formulations5,869 5,873 5,873

TechLicensingincome 332 240 240

Others 1,009 1,110 1,221

Totalsales 69,672 81,683 93,089


2.RisingMargins&ContributionofIndoreSEZ

Ciplas raw material expenses have declined from 45.8% in Q2FY11 to 40.7% in

Q3FY12,whileitsotherexpensesrosefrom25%inQ2FY12to26.4%inQ3FY12.Its

net material cost has declined significantly on YoY basis owing to improved

rationalization of product mix andbetter realizations in ARV space. The raw

material cost has declined from 45.5% in 9MFY11 to 40.9% in 9MFY12. Other

expenseshavebeenhigherduetoIndoreSEZ.

Exhibit24:CostAnalysis


40.7% 40.3% 42.4%47.9% 44.8% 45.8%

10.7% 10.6% 10.9%7.8% 8.7% 8.4%

26.4% 25.0% 24.2%26.2% 26.0% 23.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Q32012 Q22012 Q12012 Q42011 Q32011 Q22011

Material staffcost other

77.7 76.0 77.581.9 79.5 77.6


13/20

13

May02,2012

CiplaLtd.

3. Indore SEZ & Impact of Higher Capex on Return

Ratios&AssetTurnoverRatios

CiplahasspentRs.9bnforitsIndoreSEZ(ISEZ)facility,whichhousesfacilityfor

oral,topical

injectables

and

others.

The

compression

of

the

return

ratios

and

asset

turnover ratioshasbeenin lieu of ISEZ. Webelievethatwithimproving capacity

utilisation at the ISEZ plant, the operating leverage will aid the key profitability

ratios,goingforward.

Exhibit25:ReturnRatiosFY10 FY11 FY12E FY13E FY14E

ROCE(%) 21.5 17.2 18.8 19.0 20.3

ROE(%) 21.4 15.4 15.8 16.0 16.9

AssetT/O(x) 1.9 1.6 1.5 1.6 1.7


4. Decline in Capex & Rise in Revenues to Boost

EBITDA

Ciplascapex,whichhasbeenhigheratRs.6.5bninFY11,willcomedowntoRs.5

bn in FY1314E due to decline in capex. The fixed cost component of ISEZ is

approximately Rs. 3.6bn. As the fixed cost component declines, the EBITDA will

improve from 20.1% in FY11 to 23.6% in FY14E. With the revenues rising to Rs.

91.86bn in FY14E (vs. Rs. 56.07bn in FY10) and slowdown in capex, we expect

that the operating leverage would come into play and EBITDA margins would

improve, going forward. It can aptly be seen that the EBDITA margins have

declinedto20.2%inFY11from23.4%inFY10.IndoreSEZcommencedcommercialoperationsinFY2011.

Exhibit26:Revenues,Capex&EBIDTA


5.RiseinInhalerRevenuestoimproveEBITDA

CiplainhalerrevenuesarelikelytorisefromRs.3.21bninFY11toRs.8.64bnin

FY14E.Withhighergrossmarginsininhalerspace,weexpectthesametoimprove

CiplasEBDITAmargins,goingahead.

0%

5%

10%

15%

20%

25%

30%

0

20000

40000

60000

80000

100000

FY09 FY10 FY11 FY12E FY13E FY14E

Revenues Capex EBITDA

(Rsmn)

InhalersRevenues&EBIDTA


18%

20%

22%

24%

0

5000

10000

FY11 FY12E FY13E FY14E

Inhalers EBITDA

(Rsmn)


14/20

14

May02,2012

CiplaLtd.

Risks&Concerns

A.OverchargingIssueswithNPPA

While

the

NPPA

has

asked

Cipla

to

pay

Rs.

16.5bn

towards

overcharging

of

medicines, the Company maintains that these demands are contrary to orders of

the Supreme Court. The option value of the contingent liability on account of the

overchargingofmedicinesisRs.21.

B. Seven out of Top10 Products likely to come under

NLEMList

Ciplas Top10 products constitute 30% of its domestic portfolio. Five more

products willbe coming under NLEM list, taking the total to seven (Ciplox and

Novamox alreadyunder price control).Except for Seroflo, Asthalin and Budecort

all other products figure out in the latest NLEM list, which is expected to take

shape in the foreseeable future. The Government is yet to decide on the pricing

mechanism tobe adopted. Industry associations are mooting for marketbased

pricing mechanism while the health ministry/NGOs are pitching for a cost

based/tenderbasedpricingmodel.

Karvyvs.Consensus

Exhibit27:Karvyvs.ConsensusFY13E FY14E

(Rsmn) Karvy Consensus Karvy Consensus

Sales 81,232 79,831 91,878 89,509

EBITDA 19,025 18,641 21,920 21,263

Netprofit 13,686 13,432 15,802 15,339

EPS(Rs) 17.0 16.8 19.7 19.1


Ontherevenuefrontwearehigherthanconsensus,aswehavefactoredlaunchof

combination inhaler in FY 13E and FY 14E. We have also factored Vancomycin

revenues of USD 20 mn and USD 9 mn for FY 2013E and FY 2014E. EBDITA

margins

are

marginally

higher

than

consensus

due

to

scale

in

inhaler

revenues,

IndoreSEZandrationalizationinproductmix.


15/20

15

May02,2012

CiplaLtd.

Financials

Exhibit28:Profit&LossY/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E

Domesticsales 24,589 27,691 31,332 35,504 40,270

Exports 29,006 33,661 36,041 44,687 50,568

OperatingIncome 2,462 1,842 1,341 1,040 1,040

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

RawMaterial 24,530 28,604 28,329 33,153 37,100

Staff 3,189 4,642 7,337 8,217 9,203

OthersExps 12,725 14,641 15,014 17,567 19,958

R&DExpenses 2,507 2,598 2,611 3,249 3,675

TotalExpenditure 42,951 50,485 53,291 62,146 69,897

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

EBITDAmargin(%) 23.4 20.1 22.4 23.4 23.9

Otherincome 943 1,038 1,420 1,279 1,378

Interest 230 51 134 101 130

Depreciation 1,653 2,289 2,966 3,096 3,416

ProfitBeforeTax 12,168 11,407 13,742 17,168 19,815

Tax 2,285 2,277 2,958 3,421 3,951

Effective

tax

rate

(%)

18.8 20.0 21.5 20.0 20.0NetProfit 9,883 9,130 10,784 13,686 15,802

MATCreditEntitlement (700)

DeferredTax 150 333

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

EOI 1,082 107

PATafterEOI 10,815 9,604 10,784 13,686 15,802



16/20

16

May02,2012

CiplaLtd.

Exhibit29:BalanceSheetY/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E

Equity 1,606 1,606 1,606 1,606 1,606

Reserves 57,535 64,524 72,154 81,836 93,016

Networth 59,141 66,130 73,760 83,442 94,622

TotalLoans 51 4,414 2,213 2,827 3,663

DeferredTaxLiabilities 1,792 2,125 2,435 2,435 2,435

Liabilities 60,983 72,668 78,407 88,704 100,720

GrossBlock 28,954 39,290 44,559 49,259 54,259

Depreciation 8,843 10,610 13,576 16,672 20,088

NetBlock 20,112 28,680 30,983 32,587 34,171

Capitalworkinprogress 6,842 2,531 1,800 1,500 1,500

Investments 2,651 5,703 7,041 7,041 7,041

Inventories 15,126 18,832 17,096 19,842 22,289

Debtors 15,527 14,970 16,756 19,931 22,577

Cash 608 841 4,279 7,536 12,778

LoansandAdvances 12,216 12,689 13,231 15,506 17,564

OtherCurrentassets 47 4 16 16 16

TotalCurrentassets 43,524 47,336 51,379 62,831 75,225

Creditors 8,054 7,751 7,676 8,983 10,053

Othercurrentliabilities 4,092 3,831 5,119 6,272 7,163

Totalcurrentliabilities 12,146 11,582 12,795 15,255 17,216

Netcurrentassets 31,378 35,754 38,583 47,576 58,009

TotalAssets 60,983 72,668 78,407 88,704 100,720



17/20

17

May02,2012

CiplaLtd.

Exhibit30:CashFlowStatementY/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E

EBIT

11,454 10,420

12,456 15,929 18,504(Inc.)/Decinworkingcapital (1,150) (4,143) 609 (5,736) (5,191)

CashFlowfromOps 10,304 6,277 13,065 10,194 13,314

Otherincome 943 1,038 1,420 1,279 1,378

Depreciation 1,653 2,289 2,966 3,096 3,416

Interestpaid() (230) (51) (134) (101) (130)

Taxpaid() (2,435) (1,910) (2,958) (3,421) (3,951)

Dividendspaid() (1,873) (2,615) (3,154) (4,003) (4,622)

DeferredTax 150 333 311

Extraordinaries 1,082 107

Cashflow

from

operations

9,595 5,467

11,515 7,043 9,406

CapitalExpenditure() (5,019) (6,545) (4,539) (4,400) (5,000)

FreeCashFlowfromOps 4,577 (1,079) 6,977 2,643 4,406

Changesinborrowing (9,352) 4,363 (2,201) 614 837

Equityissue/(Buyback) 6,691 0

Investments (1,838) (3,052) (1,338)

Cashfromfinancingactivities (4,499) 1,311 (3,539) 614 837

Openingcash 530 608 841 4,279 7,536

Closingcash 608 841 4,279 7,536 12,778

ChangeinCash 78 233 3,438 3,257 5,242

Source:Company,

Karvy

Institutional

Research

Exhibit31:KeyRatiosFY10 FY11 FY12E FY13E FY14E

EBITDAmargin(%) 23.4 20.1 22.4 23.4 23.9

NetProfitmargin(%) 17.4 15.0 15.7 16.8 17.2

DividendPayoutratio(x) 18.9 28.6 29.3 29.3 29.3

AssetT/Oratio 1.9 1.6 1.5 1.6 1.7

Netdebt:Equity(x) 0.0 0.1 0.0 0.0 0.0

RoCE(%)

21.5 17.2 18.4 20.6 21.0

RoE(%) 21.8 15.8 15.8 17.8 18.1


Exhibit32:ValuationParameterFY10 FY11 FY12E FY13E FY14E

EPS(Rs.) 12.1 11.8 13.4 17.0 19.7

P/E(x) 25.7 26.4 23.2 18.3 15.9

EV/EBITDA(x) 18.9 19.5 15.7 12.5 10.7

P/S(x)

4.7

4.1 3.7

3.1

2.8



18/20

18

May02,2012

CiplaLtd.

Annexure

Exhibit33:ManufacturingFacilitiesNo.ofFacilities USFDA,WHO(Geneva),TGA,MHRA

Bengaluru 3.00 All

Patalganga 2.00 All

Kurkumbh 3.00 All

Goa 9.00 All

Baddi 1.00 WHO

Sikkim 1.00 None

IndoreSEZ WHO,MCC,MHRA,TGA



19/20

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TRADING

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20/20

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DisclosuresAppendix

Analystcertification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein

accurately reflecthis (their) personalview(s)about the subject security (ies) and issuer(s)and thatnopartof his (their)

compensationwas,isorwillbedirectlyor indirectlyrelatedtothespecificrecommendation(s)orviewscontained inthis

researchreport.

Disclaimer

The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information

containedherein isbasedonouranalysisanduponsourcesthatweconsiderreliable.We,however,donotvouchfor the

accuracy or the completeness thereof. This material is forpersonal information and weare not responsible for any loss

incurredbasedupon it.The investmentsdiscussedor recommended in this reportmaynotbe suitable forall investors.

Investorsmust

make

their

own

investment

decisions

based

on

their

specific

investment

objectives

and

financial

position

and

usingsuchindependentadvice,astheybelievenecessary.Whileactinguponanyinformationoranalysismentionedinthis

report,investorsmaypleasenotethatneitherKarvynorKarvyStockBrokingnoranypersonconnectedwithanyassociate

companiesofKarvyacceptsanyliabilityarisingfromtheuseofthisinformationandviewsmentionedinthisdocument.

The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above

mentionedcompaniesfromtimetotime.EveryemployeeofKarvyanditsassociatecompaniesarerequiredtodisclosetheir

individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and

investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this

recommendationhaseitherbeendisplayedorhasbeenforwardedtoclientsofKarvy.Allemployeesarefurtherrestrictedto

place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not

solicitingany

action

based

on

it.

Neither

the

information

nor

any

opinion

expressed

herein

constitutes

an

offer

or

an

invitation to make an offer, tobuy or sell any securities, or any options, futures nor other derivatives related to such

securities.

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Documents

Cipla Ltd 120502 Karvy