Q4FY11 Update Sector: Pharmaceuticals BSE Sensex: 18,211

Cipla Ltd
Quarter below expectation, no near term triggers
Cipla reported disappointing Q4FY11 results with OPM contracting 212bps on back of higher contribution from the low-margin ARV business. Further, Ciplas FY12 guidance is also not encouraging especially on the margins front in spite of the fact that 10% of sales is expected to come from Indore SEZ. The stock has under performed the broader market by ~7% in last 3 months. We have revised downwards our FY12 earning estimates by 9% to factor in lower OPM. We continue to maintain our Hold rating with a reduced target price of Rs312 (earlier Rs331) based on June' 12E earnings. Sales growth surprises but the mix disappoints Cipla reported net sales of Rs16,152mn up 22.6% which surprised positively primarily driven by the exports. However 60% of the export growth came from the ARV segment which disappointed as the same was at the cost of the margins. Domestic business grew by strong 14.7% driven by field force expansion and product launches. Margins under pressure The company reported OPM of 18.1% (lowest in last 3 years) as against our estimates of 19.9% on account of higher raw-material cost. The higher raw-material cost was on back of increasing contribution from the ARV segment. We estimate the ARV segment to have margins in high single digit. Key call takeaways 1) The company has guided for 10-12% revenue growth and 18-20% OPM for FY12. 2) Indore SEZ is expected to contribute 10% of the total sales in FY12 from current 4% in Q4FY11. Further, US FDA inspection of the facility is still pending 3) On the domestic front Cipla now has strong field force of 6,000 MR and plans to enter new TA (oncology and CNS) 4) DEPB income was at Rs600mn for FY11 5) The low-margin ARV business contributed 30% (22% earlier) to the total exports for the quarter. 6) For FY11 the debt was at Rs3,500mn and cash at Rs2,500mn. KEY FINANCIALS (Rs mn)
Total Revenue YoY Gr.(%) Op. Profit OPM (%) Adj. Net Profit YoY Gr.(%) FY09 51,786 23.2 9,487 18.3 7,769 11.0 9.7 18.9 19.2 31.2 4.9 26.4 FY10 55,133 6.5 12,183 22.1 9,864 27.0 12.3 21.7 19.2 24.7 4.4 19.7 FY11E 62,109 12.7 13,155 21.2 9,689 (1.8) 12.1 18.4 15.5 25.1 3.9 18.2 FY12E 71,627 15.3 15,075 21.0 11,035 13.9 13.7 18.8 15.8 22.0 3.4 15.9 FY13E 82,867 15.7 17,746 21.4 12,373 12.1 15.4 19.3 15.8 19.7 2.9 13.4

HOLD CMP TP

Rs303 Rs312
06 May 2011

Sushant Dalmia, CFA sushant.dalmia@pinc.co.in +91-22-6618 6462

QUARTERLY SNAPSHOT
Sep-10 16,154 12.0 3,516 21.8 2,506 (9.5)

(Rs mn)

Net Revenue YoY Gr.(%) Op. Profit OPM(%) Adj.Net Profit YoY Gr. (%)

Quarter Ended Dec-10 March-11 15,537 16,152 8.0 22.6 3,182 3,021 20.5 18.1 2,327 2,140 (24..7) (1.0)
Q3 FY2011 Earnings Summary Source: PINC Research, Company

Q4FY11 Update

STOCK DATA
Market cap Book Value per share Shares O/S (F.V. Rs2) Free Float Avg. Trade Value (6 months) 52 week High/Low Bloomberg Code Reuters Code Rs240bn Rs92 803mn 63.2% Rs499mn Rs381/300 CIPLA IN CIPL.BO

PERFORMANCE (%)
Absolute Relative 1M (4.0) 3.9 3M (7.8) (6.6) 12M (12.1) (18.0)

RELATIVE PERFORMANCE
Cipla 500 425 350 275 200 May -10 BSE (Rebased) BSE Healthcare (Rebased)

KEY RATIOS
Dil. EPS (Rs) ROCE (%) RoE (%) PER (x) EV/ Net Sales (x) EV /EBDITA (x)

Aug-10

Nov -10

Feb-11

May -11

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Cipla

Outlook and Valuation

We have revised downward our FY12 earning estimates to factor in OPM of 21.0% (still higher than the guidance) from earlier 22.8%. We now expect net sales and earnings to clock CAGR of 15.5% and 12.6% respectively over FY11-13E. We have valued the stock at 22x June12E earnings and continue to maintain HOLD rating on the stock with a reduced target price of Rs312. Key long term trigger for the stock going ahead would be approval of combination inhalers in EU.

Exhibit 1 - Earnings Summary (Rs mn)

March Ended Gross Sales Excise Duty Excise duty rate Net Sales Other Operating Income Net Revenues Expenditure EBITDA EBITDA Margins (%) EBITDA (ex tech fees) EBITDA - excl technology income (%) Interest Depreciation Other income Forex gain/(loss) PBT Tax Tax rate (%) Reported profit Adjustments Recurring profit Net margin (%) Q4FY10 13,290 115 0.9 13,175 572 13,747 10,967 2,780 20.2 2,208 16.8 5 495 1,401 (200) 3,481 726 20.9 2,755 594 2,162 16.4 Q4FY11 16,272 120 0.7 16,152 540 16,692 13,671 3,021 18.1 2,481 15.4 18 697 204 2,510 370 14.7 2,140 2,140 13.2 % Ch YoY 22.4 3.8 -13 bps 22.6 (5.6) 21.4 24.7 8.7 -212 bps 12.4 -140 bps 293.5 40.8 (85.5) (100.0) (27.9) (49.0) -611 bps (22.3) (100.0) (1.0) -316 bps Q3FY11 15,158 144 0.9 15,014 523 15,537 12,355 3,182 20.5 2,659 17.7 29 653 257 2,757 430 15.6 2,327 2,327 15.5 % Ch QoQ 7.4 (16.9) -21 bps 7.6 3.2 7.4 10.7 (5.1) -238 bps (6.7) -235 bps (38.2) 6.8 (20.8) (9.0) (14.0) -86 bps (8.0) (8.0) -225 bps FY10 54,116 522 1.0 53,594 2,719 56,314 42,718 13,596 24.1 10,877 20.3 237 1,878 1,833 (635) 12,679 2,485 19.6 10,194 (635) 10,829 20.2 FY11 61,726 487 0.8 61,238 1,941 63,180 49,815 13,365 21.2 11,423 18.7 51 2,536 794 10 11,581 1,910 16.5 9,671 8 9,663 15.8 Ch YoY 14.1 (6.6) -17 bps 14.3 (28.6) 12.2 16.6 (1.7) -299 bps 5.0 -164 bps (78.3) 35.0 (56.7) (101.6) (8.7) (23.1) -311 bps (5.1) (101.3) (10.8) -443 bps Lower tax rate for the quarter Rise on the back of commissioning of the Indore SEZ Last quarter consisted sale of i-pill for Rs950mn Margins impacted by High raw-material cost on back of increasing contribution from lowmargin ARV segment PINC Comments Strong domestic and export formulations led the growth

Source: PINC Research, Company

sushant.dalmia@pinc.co.in

Cipla Exhibit 2 - Expenditure Break-up (Rs mn)

Year to 31 March Net Sales Consumption of Raw Materials % of Net sales Staff Cost % of Net sales Other Expenses % of Net sales Total Expenditure % of Net sales Q4FY10 13,175 6,108 46.4 999 7.6 3,860 29.3 10,967 83.2 Q4FY11 16,152 7,998 49.5 1,308 8.1 4,365 27.0 13,671 84.6 % Ch YoY 22.6 30.9 315 bps 30.9 52 bps 13.1 -227 bps 24.7 140 bps Q3FY11 15,014 6,958 46.3 1,351 9.0 4,046 26.9 12,355 82.3 % Ch QoQ 7.6 14.9 317 bps (3.2) -90 bps 7.9 8 bps 10.7 235 bps FY10 53,594 24,706 46.1 3,711 6.9 14,301 26.7 42,718 79.7 FY11 61,238 29,146 47.6 5,410 8.8 15,260 24.9 49,815 81.3 Ch YoY 14.3 18.0 150 bps 45.8 191 bps 6.7 -176 bps 16.6 164 bps On account of Indore SEZ and higher selling expenses Addition of Indore SEZ On back of increasing contribution of low-margin ARV segment PINC Comments

Source: PINC Research, Company

Exhibit 3 - Geographic Revenue Mix (Rs mn )

Year to 31 March Domestic % of Total Revenues Exports % of Total Revenues Formulations APIs Sales Other operating income % of Total Revenues Total Revenues Q4FY10 5,688 41.0 7,602 54.8 6,139 1,463 13,290 572 4.1 13,862 Q4FY11 6,522 38.8 9,750 58.0 7,428 2,322 16,272 540 3.2 16,812 % Ch YoY 14.7 -223 bps 28.2 315 bps 21.0 58.7 22.4 (5.6) -92 bps 21.3 Q3FY11 7,340 46.8 7,818 49.9 6,432 1,386 15,158 523 3.3 15,681 % Ch QoQ (11.1) -801 bps 24.7 814 bps 15.5 67.5 7.4 3.2 -13 bps 7.2 FY10 25,111 44.2 29,005 51.0 23,205 5,800 54,116 2,719 4.8 56,835 FY11 28,178 44.3 33,548 52.7 26,756 6,792 61,726 1,941 3.0 63,667

Change YoY 12.2 8 bps 15.7 166 bps 15.3 17.1 14.1 (28.6) -174 bps 12.0

PINC Comments Driven by field force expansion and product launches Driven by ARV segment which contributed 30% of export sales

Lumpy business Expected to remain subdued

Source: PINC Research, Company

Ended March (Figures in Rs mn based in IFRS)

sushant.dalmia@pinc.co.in

Cipla Exhibit 4 - Revenue Classification (Rs mn)

Domestic Revenues Exports Revenues Other operating income

8,000

6,000

4,000

2,000

Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11

Source: PINC Research, Company

Exhibit 5 - Operating Expenses and Profit break-up

Other expenditure Staff cost RM Cost EB ITDA

100%

75%

50%

25%

0% Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11

Source: PINC Research, Company

sushant.dalmia@pinc.co.in

Cipla Exhibit 6 - Margin Movement

Gross margins (%) (LHS) EB IDTA margin EB IDTA margin (ex tech fees) NPM %

59.0%

30.0%

48.0%

25.0%

37.0%

20.0%

26.0%

15.0%

15.0% Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11

10.0%

Source: PINC Research, Company

Exhibit 7 - Sales and EBITDA Growth v/s Currency Depreciation

Sales growth (%) EB ITDA growth (Ex Tech fees) (YoY %) Currency depreciation (%)

65%

45%

25%

5% Q3FY09 -15%
Source: PINC Research, Company

Q4FY09

Q1FY10

Q2FY10

Q3FY10E

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

sushant.dalmia@pinc.co.in

Cipla

Year Ended March (Figures in Rs mn)

Income Statement Net sales Other operating income Total Revenues Growth (%) EBITDA Growth (%) Depreciation Other Income EBIT Interest Paid PBT (before E/o items) Tax Provision E/o income/(loss) Net Profit Adjusted Net Profit Growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) Balance Sheet Equity Share Capital Reserves & surplus Shareholders' funds Minorities interests Total Debt Capital Employed Net fixed assets Cash & Cash Eq. Net Other current assets Investments Net Deferred tax Assets Total Assets P/E Band FY09 49,608 2,178 51,786 23.2 9,487 12.2 1,518 1,375 9,343 329 9,014 1,245 7,769 7,769 11.0 9.7 11.3 FY09 1,555 41,923 43,478 9,402 52,880 23,588 534 29,600 801 (1,642) 52,881 FY10 53,595 1,538 55,133 6.5 12,183 28.4 1,653 1,999 12,529 230 12,299 2,435 950 10,814 9,864 27.0 12.3 26.6 FY10 1,606 57,500 59,106 51 59,156 26,954 621 30,909 2,464 (1,792) 59,156 FY11E 60,879 1,230 62,109 12.7 13,155 8.0 2,570 1,236 11,822 6 11,815 2,127 9,689 9,689 (1.8) 12.1 (1.8) FY11E 1,606 64,355 65,961 51 66,011 30,884 500 32,850 3,568 (1,792) 66,011 FY12E 70,336 1,292 71,627 15.3 15,075 14.6 2,866 1,254 13,464 6 13,458 2,422 11,035 11,035 13.9 13.7 13.9 FY12E 1,606 72,162 73,768 51 73,819 37,384 500 34,948 2,778 (1,792) 73,819 FY13E 81,575 1,292 82,867 15.7 17,746 17.7 3,548 1,274 15,472 6 15,466 3,093 12,373 12,373 12.1 15.4 12.1 Cash Flow Statement PBIT Depreciation Total Tax Paid Chg in working capital Other operating activities Cash flow from oper (a) Capital Expenditure Chg in investments Other investing activities Cash flow from inv.(b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Change in Minority Int Dividend (incl. Tax) Other financing activities Cash flow from fin. (c) Net chg in cash (a+b+c) FY09 7,990 1,518 (1,245) (5,565) 1,045 3,743 (6,247) 134 (6,113) (2,370) 3,998 4 (2,278) (1,165) 559 (1,811) FY09 18.3 15.7 0.8 0.2 208.6 18.9 19.2 4.9 26.4 31.2 25.3 5.4 FY09 34.5 7.8 12.8 65.6 6,247 54.7 18.4 FY10 10,530 1,653 (2,435) (1,396) 1,769 10,120 (5,219) (1,663) (6,882) 3,238 6,691 (9,352) 5 (2,885) (1,165) (6,706) (3,468) FY10 22.1 18.4 1.0 (0.1) 204.6 21.7 19.2 4.4 19.7 24.7 21.1 4.1 FY10 7.6 -1.2 12.4 -72.2 5,219 55.5 22.1 FY11E 10,585 2,570 (2,127) (1,820) 1,230 10,438 (6,500) (1,104) (7,604) 2,834 6 (2,834) (1,165) (3,993) (1,159) FY11E 21.2 15.9 1.0 (0.0) 193.1 18.4 15.5 3.9 18.2 25.1 19.8 3.7 FY11E 15.0 14.0 12.0 10.0 6,500 54.0 21.2 FY12E 12,209 2,866 (2,422) (2,098) 1,248 11,803 (6,500) 790 (5,710) 6,093 6 (3,228) (1,165) (4,386) 1,707 FY12E 21.0 15.7 1.1 0.0 178.1 18.8 15.8 3.4 15.9 22.0 17.5 3.3 FY12E 18.0 12.0 13.9 10.0 6,500 53.7 21.0 FY13E 14,198 3,548 (3,093) (233) 1,268 15,687 (6,500) (2,020) (8,519) 7,168 7 (3,619) (1,165) (4,777) 2,391 FY13E 21.4 15.2 1.3 0.1 155.0 19.3 15.8 2.9 13.4 19.7 15.3 2.9 FY13E 20.0 12.0 13.0 5.0 6,500 54.1 21.4

FY13E == Key Ratios 1,606 80,916 82,522 51 82,573 43,884 500 35,181 4,799 (1,792) 82,573 OPM (%) Net Margin (%) Div. Yield (%) Net debt/Equity (x) Net Working Capital (days) ROCE (%) RoE (%) EV/Net Sales (x) EV/EBITDA (x) PER (x) PCE (x) Price/Book (x)
EV/EBIDTA

560 420 280 140 0 May -03 30.0x 25.0x 20.0x 15.0x

Key Assumptions Formulation Export Growth (% yoy) Bulk Export Growth (% yoy) Domestic Formulation Growth (% yoy) Domestic Bulk Growth (% yoy) Capital expenditure Gross margins (%) EBITDA margins (%)

May -05

May -07

May -09

May -11

sushant.dalmia@pinc.co.in

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T E A M
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SINGAPORE DESK
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