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Company Report

Cipla Ltd CMP

21st November, 2012




Cipla continues to maintain its leadership position in various therapeutic segments including respiratory, anti-virals, gynaecology and urology in the domestic market.




The company has registered sharp numbers for the quarter ending September 2012. The revenue for the September 2012 quarter is pegged at Rs.2191.84 crore; about 23.86% up against Rs.1769.66 crores recorded during the year-ago period; driven by better product mix i.e. lower proportion of anti retrovirals, Lexapro benefits; price hikes and currency benefits. It gained Rs.26 crores on account of foreign exchange gain. Operating profit skyrocketed about 58% at Rs.676.95 crore vis-à-vis Rs.429.25 crores. Material cost at 36.75% of total sales decreased by 3.8% during Q2FY13 as compared to Q2FY12. PAT reported a handsome growth of 61.83% to Rs.500.01 crores from Rs.308.97 crores. Operating profit margins expanded sharply by 663 bps at 30.89% vis-à-vis 24.26% whereas NPM stood at 22.81% as against 17.46% y-o-y.




Domestic revenues grew by 13.5% to Rs.962 cr during Q2 FY13, up from Rs. 847 cr during Q2 FY12. The growth in domestic revenues was largely on account of growth in anti-asthma, antibiotics and cardiovascular therapy segments.




Exports of formulations grew by 38.2% to Rs.1039 cr during Q2 FY13, up from Rs.752 cr during Q2 FY12. Exports of APIs grew by 9.0% to Rs.174 cr during Q2FY13, from Rs.159 cr during Q2FY12. The growth in export revenues was primarily due to growth in anti-depressants, anti-ulcerant and anti-asthma segments.

Rs.390.00

Target Price

Rs.500.00

BSE Code

500087

NSE Code

CIPLA

Market Cap (Rs Cr.)

31289.85

52 Week High/Low

400.60/286.50

Industry

Pharmaceuticals

Face Value

Rs.2.00

Shares O/S

802921357

EPS

14.25

Book Value

95.14

P/E

27.35

P/B

4.10

Shareholding Pattern

BUY

Valuation

Research Analyst: Vineeta Mahnot

With strong product mix, increasing focus on exports, firm guidance and ramp up of its facilities, Cipla’s revenue visibility looks strong. We believe Cipla Ltd. is trading at an attractive valuation at 21.69x and 18.75x of FY13EPS of Rs.17.97 and FY14EPS of Rs.20.78. We initiate a ‘BUY’ on the stock with a target price of Rs.500 (appreciation of about 28%) with the medium to long term investment horizon.

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Business Details Chemical, Industrial & Pharmaceutical Laboratories, now known as Cipla, was incorporated 1935. Khwaja Abdul Hamied, the founder of Cipla gave the company all his patent and proprietary formulas for several drugs and medicines, without charging any royalty. On August 17, 1935, Cipla was registered as a public limited company with an authorised capital of Rs 6 lakhs. Business of the company: The company focuses on development of new formulations and has a wide range of pharmaceutical products. It offers prescription drugs, bulk drugs, animal products and pesticides. It also offers a wide range of food and beverages, baked foods, oral hygiene products, detergents, room fresheners and personal care products. Almost 55% of its overall income from its operations come from outside India. It has 5,500 registered products in various countries. Cipla offers drugs used for treatment of cancer, Alzheimer's, arthritis, Parkinson's, cardiovascular diesases and many more. It also offers drugs that prevents transmission of AIDS from mother to child. The company provides consulting services on preparation of products and materials, conducts plant evaluation and supplies plant equipments.

Cipla has set up two institutes namely Dr K.A Hamied Institute and Cipla Cancer Palliative Care & Training Centre. It has a presence across 170 countries with manufacturing units approved by regulatory authorities like USFDA, WHO-Canada and MHRA-UK, among others. Cipla was first company outside US and Europe to launch CFC-free inhalers. In 2007 Cipla launched oral emergency contraceptive pill under the brand name I-Pill. Cipla also launched a breakthrough screening technology in India called the 'No Touch Breast Scan (NTBS); ' the first-ever painless, non- invasive and radiation-free breast scanning technique for detecting breast cancer at an early stage. In 2009, Cipla launched generic versions of anti-flu drugs oseltamivir and zanamivir in the local market to treat the H1N1 influenza, spreading across the globe and in India. In 2010, Piramal Healthcare Limited announced the signing of a definitive agreement with Cipla Limited for purchase of all intellectual property rights in India related to 'i-pill' for an aggregate consideration of Rs 95 crore.

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Growing Industry India's pharmaceutical sector is gaining its position as a global leader. The Indian pharmaceutical industry maintained its momentum and registered a growth of about 15 percent, according to ORG-IMS statistics. This growth can be attributed to prominent factors, such as a growing middle class population, rapid urbanization, increase in lifestylerelated diseases and growth in the health insurance sector. India tops the world in exporting generic medicines worth US$ 11 billion. The size of the Indian formulations market, which currently stands at around Rs 62,000 crore (US$ 11.21 billion), is growing at 15-20 per cent annually. The cumulative drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 9,596 million between April 2000 to May 2012, according to the latest data published by Department of Industrial Policy and Promotion (DIPP). India's exports of drugs, pharmaceutical and fine chemicals grew by 27 per cent to Rs 60,000 crore (US$ 10.85 billion) for the year ended March 2012, according to data compiled by Pharmaceutical Exports Council of India (Pharmexcil). Exports were higher by 27.2 per cent to Rs.6,480.3 crore in the month of June 2012. During the June 2012 quarter, exports in rupee terms grew by a robust 37.1 per cent as compared to a 18.6 per cent growth in the year ago quarter. A sharp depreciation in the value of rupee boosted the growth in exports during the quarter. During April-June 2012, exports to US grew by a whopping 47.2 per cent. Exports to UK and Germany rose by 25.8 per cent and 34.6 per cent, respectively. Exports to Russia and Brazil grew by 30.5 per cent and 44.3 per cent, respectively. Drug imports were higher by 42.2 per cent to Rs.1,359.4 crore in the month of June 2012. In the June 2012 quarter, drug imports grew by 39.4 per cent to Rs.4,050 crore. The export of drugs from India are expected to grow by 22.7 per cent to Rs.77,747 crore in 2012-13. Drug exports from India are expected to touch Rs.81,889 crore by 2013-14. The pro-generic policies of the developed and developing countries, the reverse engineering skills, price competitiveness and aggressive marketing strategies of the Indian pharma companies are likely to boost exports. Thus, CMIE expects that Indian drug exports to remain strong in the next two years. India imports bulk drugs and chemicals to manufacture formulations. Drugs imports are expected to increase by 22.7 per cent to Rs.17,655 crore in 2012-13. In the first-half of the year, drug imports are likely to have turned costlier due to sharp depreciation in the value of rupee. However, in the second-half, as the rupee is likely to be stronger, imports are expected to become less expensive. Both, the developed and developing countries are increasing their exposure to generic drugs from branded drugs. This will help them to rein in the rising health cost.

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Indian pharma companies are increasingly filing Abbreviated New Drug Approval (ANDAs) application for the approval by the US Food & Drug Administrations (FDA). According to media reports, Indian companies are filing an average of 1,000 ANDAs every year in the US. The share of India in the total bulk drug filings in the US increased from 45 per cent in 2009 to 51 per cent in 2011. A number of drugs are expected to go off-patent in the US in the next two years. The multi-billion opportunity through the patent-cliff remains strong until 2015. Six new projects were announced in the drugs industry in the September 2012 quarter with a total investment of Rs.1,274 crore. Eight projects with a total investment of over Rs.1,273 crore got commissioned during the September 2012 quarter. In the next two quarters of 2012-13, 43 projects with a total investment of over Rs.5,847 crore are scheduled to commission. In 2013-14, 24 projects with an investment of Rs.3,220 crore are scheduled to commission.

6 projects announced in Sept 2012 quarter Qtr ended

Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12

New Projects Rs. (Nos.) Crores 9 1,760 26 1,184 36 2,385 30 1,470 12 740 19 436 71 6,230 29 255 12 401 4 175 8 1,953 7 1,612 6 1,274

Projects Completed (Nos.) 9 17 17 15 7 16 20 19 16 17 14 9 8

Rs Crores 605 480 1,052 1,459 788 3,065 876 1,554 899 530 3,142 952 1,273

Projects Shelved Rs (Nos.) Crores 6 450 5 325 5 320 1 40 2 150 0 0 3 149 2 50 7 250 2 18 3 83 0 0 0 0

On the back of increasing middle-class population base, improvements in medical infrastructure and the establishment of IP rights, the Indian pharma industry is estimated to grow manifolds. Revenues from the domestic market are also expected to grow at a healthy pace. However, export realization of companies is likely to be hurt due to an expected appreciation in the value of rupee in the second-half. Resultantly, the sales growth of the industry is expected to marginally slowdown in comparison to the first-half of the year. Sales are expected to grow by 14.8 per cent in the December 2012 quarter and by 13.3 per cent in the March 2013 quarter. A strong rupee in the second-half will help to ease the cost pressure on the industry which imports around 40 per cent of its raw material requirements. The PBDIT margin is likely to be in the range of 19-20 per cent. Industry is expected to earn a net profit of around 12-12.5 per cent of total income in the second-half of the year.

Furthermore, a 'Pharma Vision 2020' has been prepared by the Department of Pharmaceuticals, for making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose, the department will provide requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and such other measures. Pharmaceutical companies such as Cipla, Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the government's ambitious 'Jan Aushadhi' project. In an attempt to commercialise the project, the government is likely to rope in the private sector to bulk-procure generic drugs from them. There are 117 Jan Aushadhi stores across the country and the plan is to expand to at least 600 in the next two years and 3,000 by 2016.

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Firm Guidance Cipla plans to target a revenue growth in excess of 15% for the year 2012-13 to stay near about Rs.8000 crore which is about USD 1.5 billion. It hopes to achieve a turnover of USD 5 billion by the year 2020. The domestic formulation business is expected to grow by 17% to 18% in the coming year led by key therapies like respiratory, CVS and antibiotic. On the exports front, the company plans to focus more on Europe inhalers business and expects growth to come in from there followed by some of the African markets. EBIDTA margins are expected to be higher as compared to that of last year as during the first two quarters the company has enjoyed benefits of Lexapro which benefitted margins nicely. Going forward too, the company expects to have better margins backed by the cost rationalization and the better business growth. Capex for the year 2012-13 would be around Rs.400-500 crores. The Company is setting up additional R&D facilities at Vikhroli and Patalganga. It is anticipated that operations will commence during 2012-13. The Company is also setting up API facilities at Patalganga, Bengaluru and Kurkumbh which are expected to be completed in 2012-13. Tax rate would be little higher than last year at 24% for the year 2012-13.

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Dymista sales- next growth driver Cipla has started Dymista (used for the treatment of allergic rhinitis) supply to its partner Meda for distribution in the US market. It is expected to contribute in fourth quarter of current fiscal. Cipla has entered into a partnership agreement with Meda for the supply and marketing of Dymista in the US market while Cipla is the manufacturing partner. The product is expected to generate revenues of $25-$30 million at peak levels. Further, the company has emphasized on cost rationalization measures and changed its product mix that is lower proportion of antiretroviral (ARVs) and higher contribution of antidepressant segment which is benefitting it. Cipla also has better pricing power as it has taken price increases across therapies and markets and has witnessed better price realization in the recent quarter gone by. The company has started focusing on its international business due to price control in India. As earlier its domestic and exports business mix stood at 50%-50% of the turnover; now exports has been at 56% of the turnover and 44% goes to the domestic business. The company gets better margins outside India.

Ramp up of Indore SEZ facility The Indore SEZ facility has done about Rs.150 odd crores in the latest quarter ended September 2012 and the same in the last quarter adding to about Rs.300 crore in the first half of the current fiscal aiding the exports growth. Capacity utilization stood at about 70% for only tablets and capsules. The capacity utilisation at the Indore SEZ factory has improved significantly compared to the previous year and is expected to reach optimum capacity in the coming years. The facility has recently received USFDA approval. A few of the product filing to USFDA has already started and the company expects to file more going ahead. Earlier, the company with its partners continues to file ANDAs but with the USFDA approval it has filed about 4 ANDAs on its own in the last six months.

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Consolidated Profit & Loss Account Rs. Crore

Particulars Net sales

FY10

FY11

FY12

FY13E

FY14E

5359.52

6323.84

7020.71

8165.09

9308.20

17.99%

11.02%

16.30%

14.00%

Growth Expenditure

4291.91

4954.60

5361.86

6131.98

6962.53

EBITDA

1067.61

1369.24

1658.85

2033.11

2345.67

28.25%

21.15%

22.56%

15.37%

Growth EBITDA margin

19.92%

21.65%

23.63%

24.90%

25.20%

Other income

353.50

91.68

139.52

187.80

204.78

Depreciation & Amortisation

167.07

273.33

312.22

319.23

349.06

EBIT

1254.04

1187.59

1486.15

1901.67

2201.39

EBIT margin

23.40%

18.78%

21.17%

23.29%

23.65%

22.95

25.10

38.34

19.05

25.19

PBT

1231.09

1162.49

1447.81

1882.62

2176.20

Tax

243.50

195.36

306.51

451.83

522.29

PAT

987.59

967.13

1141.30

1430.79

1653.91

0.00

22.44

2.94

11.82

14.35

987.59

989.57

1144.24

1442.61

1668.26

0.20

15.63

26.08

15.64

Interest

Share of JV/Associates Adjusted PAT Growth Net Profit margins

18.43

15.65

16.30

17.67

17.92

Extraordinary item

95.00

0.00

0.00

0.00

0.00

Reported PAT

1082.59

989.57

1144.24

1442.61

1668.26

Equity Capital

160.58

160.58

160.58

160.58

160.58

Res. & Surplus

5749.99

6505.55

7478.35

8,599.80

9,866.61

Equity Shares

80.29

80.29

80.29

80.29

80.29

Adjusted EPS

12.30

12.32

14.25

17.97

20.78

Ratios Particulars

FY10

FY11

FY12

FY13E

FY14E

Return on Equity

16.71

14.84

14.98

16.47

16.64

Return on Capital employed

21.20

16.48

19.34

21.49

21.72

Debt/Equity

0.00

0.08

0.01

0.01

0.01

Asset turnover

0.73

0.74

0.75

0.76

0.75

Current Ratio

3.60

3.94

3.14

3.15

3.22

Book value per share

73.62

83.03

95.14

109.11

124.89

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Balance Sheet Rs. Crore Particulars

FY10

FY11

FY12

FY13E

FY14E

Share Capital

160.58

160.58

160.58

160.58

160.58

Reserves & Surplus

5749.99

6505.55

7478.35

8,599.80

9,866.61

Shareholders’ funds

5910.57

6666.13

7638.93

8760.38

10027.19

5.07

541.92

44.91

90.72

109.51

179.15

213.12

233.24

233.24

233.24

Borrowings Deferred tax Liability Sources of funds

6094.79

7421.17

7917.08

9084.34

10369.94

Gross block

2,897.26

4,240.55

4,626.90

5267.80

5817.62

Accumulated Depreciation

886.09

1,146.37

1,411.11

1,730.34

2,079.40

Net block

2011.17

3094.18

3215.79

3537.46

3738.22

Capital work in progress

684.24

285.34

371.17

500.44

639.94

Investments

246.41

590.77

1,268.81

1,397.03

1,599.83

0.00

0.00

0.00

0.00

0.00

Inventories

1,512.58

1,906.16

1,850.08

2,245.66

2,611.82

Sundry debtors

Projects in progress

1,566.63

1,490.82

1,553.58

1,791.18

2,165.90

Cash and bank balance

62.06

101.02

95.66

133.67

191.11

Other current assets

4.70

0.00

0.00

0.00

0.00

Loans and advances

1,221.34

1,128.36

995.16

1,176.30

1,401.47

Total current assets

4,367.31

4,626.36

4,494.48

5,346.81

6,370.30

Deferred tax asset Current liabilities and provisions

0.00

0.00

0.00

0.00

0.00

1,214.34

1,175.48

1,433.17

1,697.40

1,978.35

Net current assets

3,152.97

3,450.88

3,061.31

3,649.41

4,391.94

0.00

0.00

0.00

0.00

0.00

6,094.79

7,421.17

7,917.08

9,084.34

10,369.94

Misc exp Uses of funds

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Quarterly Financial Highlights Rs. Crore Particulars

Q2FY13

Q2FY12

Q1FY12

YoY%

QoQ%

Revenues

2191.84

1769.66

1958.19

23.86

11.93

Expenditures

1514.89

1340.41

1418.34

13.02

6.81

Operating Profit

676.95

429.25

539.85

57.71

25.40

Adjusted Net Profit

500.01

308.97

400.76

61.83

24.77

OPM%

30.89

24.26

27.57

663bps

332bps

NPM %

22.81

17.46

20.47

535bps

234bps

Adjusted EPS

6.23

3.85

4.99

61.83

24.85

Past Price movement of the stock

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