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Cipla Q2FY12 Result Update

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					                                                                                                                                                   Cipla Ltd




                                                                                                                                                                                    Result Update
                                                                                                       Margins surprised positively - Maintain Hold

November 14, 2011                                                                  n   Cipla’s Q2FY12 results were above expectation with a)
Reco                                         Previous Reco                             Revenues up 10% to Rs17.3bn b) EBITDA up 19% to Rs4.4bn
Hold                                                                 Hold              and c) APAT up 20% to Rs2.9bn
CMP                                              Target Price                      n   Revenues were driven 9% growth in Exports & 12% growth in
Rs288                                                              Rs299               domestic business. Adj EBITDA margins improved by 290bps
                                                                                       to 23.7% led by improvement in gross margins by 630bps to
EPS change FY12E/13E (%)                                                  NA
                                                                                       59% which is the highest since FY08
Target Price change (%)                                                        6
Nifty                                                                5,148         n   Going forward – we believe such higher gross margins are not
Sensex                                                              17,119             sustainable and will return to 53-55%. EBITDA margins will
                                                                                       subsequently come down to 22% in H2FY12
Price Performance
(%)                                 1M       3M            6M 12M                  n   Maintain Hold with a target price of Rs299 (17xFY13 EPS of
Absolute                              0       (2)           (5)      (13)              Rs17.6)
Rel. to Nifty                        (0)      (3)            1           3
                                                                                   Q2FY12 Result Highlights
Source: Bloomberg
                                                                                   ¾     10% growth in Revenue was led by
Relative Price Chart
400     Rs                                                           %    20
                                                                                         •   9% growth in Exports business (contributes 52%) was mainly due to 13%
                                                                                             growth in export formulations. This implies incremental sales of Rs880mn YoY
370                                                                       14
                                                                                             for Q2’12 and Rs1.2bn for H1’12 which came from Indore SEZ.
                                                                                         •
340                                                                       8
                                                                                             12% growth in Domestic business (contributes 48%) led by 15% growth in
310                                                                       2
                                                                                             generic business
                                                                                         •
280                                                                       -4
                                                                                             5% de-growth in low margins API business (contributes 9%)
250                                                                       -10
 Nov-10      Jan-11      Mar-11     May-11    Jul-11       Sep-11
                                                                                   ¾     EBITDA margins (adj. for forex & Tech inc.) expanded 290bps YoY to 23.7% led by
                      Cipla (LHS)            Rel to Nifty (RHS)


Source: Bloomberg                                                                        •   630 bps improvement in gross margins to 59% which was marred by
                                                                                         •   212 bps expansion in staff cost (up 36% YoY) and 133bps expansion in other
Stock Details
                                                                                             expenses (up 16% YoY) led by increased overheads at the Indore SEZ plant
Sector                                       Pharmaceuticals
Bloomberg                                                 CIPLA@IN                 Going forward
Equity Capital (Rs mn)                                               1606          ¾     Company has guided for 10-12% growth in top-line over FY11-13E
Face Value(Rs)                                                                 2
                                                                                   ¾     Growth in exports will mainly be driven by ramp-up in Indore SEZ operations which
No of shares o/s (mn)                                                    803
                                                                                         will take 2-3 years to reach optimum levels
52 Week H/L                                                       381/274
Market Cap (Rs bn/USD mn)                                   231/4,594
                                                                                   ¾     In the domestic business the company plans to launch 25-30 new products every
                                                                                         year and is expected to grow by 10-12%
Daily Avg Volume (No of sh)                                       1323522
Daily Avg Turnover (US$mn)                                                7.5      ¾     The company is investing Rs12bn over the next 2 years, of which Rs6bn will be for
                                                                                         API facilities. Lexapro API supplies to Teva will commence during H2FY12
Shareholding Pattern (%)                                                           ¾     Higher gross margins reported in current quarter are not sustainable and will return
                              Sep-11 Jun-11 Mar-11                                       to 53-55% and EBITDA margins will come down to 22% in H2FY12
Promoters                           36.8           36.8                  36.8
FII/NRI                             17.1           18.4                  19.1      Valuation
Institutions                        19.9           19.1                  18.6      We expect Cipla to report 14% revenue growth in FY12 and 16% in FY13. We expect
Private Corp                         5.3               4.8                4.4      company’s base EBITDA margins to improve from 21.2% in FY11 to 21.5% in FY12 and
Public                              20.9           21.0                  21.1      22.5% in FY13 as utilization of recently created manufacturing capacities increases. On
                                                                                   account of low visibility of growth going forward, we value the company at 17XFY13
Source: Capitaline
                                                                                   EPS to arrive at a target price of Rs299 and maintain Hold rating. At CMP, the stock is
Deepak Malik                                                                       trading at 20X of FY12E and 16X of FY13E.
deepak.malik@emkayglobal.com
                                                                                   Financials                                                                          Rs mn
+91 22 6612 1257
Ashish Thavkar                                                                     YE-         Net       EBITDA                 EPS     EPS     RoE             EV/
ashish.thavkar@emkayglobal.com                                                     Mar        Sales    (Core)   (%)    APAT     (Rs)   % chg    (%)    P/E    EBITDA    P/BV
+91 22 6612 1254                                                                   FY10      56,057   13,742    24.5   10,545   13.1    8.5     21.1   21.9    16.8      3.9
                                                                                   FY11      63,180   13,375    21.2   9,692    12.1    (8.1)   15.6   23.9    17.6      3.5
Bhavita Nagrani
                                                                                   FY12E     71,863   15,444    21.5   11,395   14.2    17.6    16.0   20.3    15.3      3.1
bhavita.nagrani@emkayglobal.com
                                                                                   FY13E     83,325   18,765    22.5   14,169   17.6    24.3    17.5   16.3    12.5      2.7
+91 22 6624 2486

Emkay Global Financial Services Ltd                                                                                                                                             1
                                                  Cipla Ltd                                                                Result Update

  Key Financials – Quarterly

  Rs mn                            Q2FY11       Q3FY11    Q4FY11      Q1FY12    Q2FY12    YoY (%)    QoQ (%)    YTD12    YTD11    YoY (%)
  Net Revenues                      15,799       15,014    16,152      15,503    17,318       9.6       11.7    32,822   30,073        9.1
  Technology Income                    120         151         160        98        78      (35.1)     (20.9)     176      279      (36.9)
  Other Operating Income               250         372         380       173       244       (2.4)      41.5      417      715      (41.7)
  Forex gain/ (loss)                   175           0           0       140       140           -          -     280       75              -
  Total Revenues                    16,344       15,537    16,692      15,914    17,780       8.8       11.7    33,695   31,142        8.2
  Expenditure                       12,678       12,355    13,671      12,219    13,404       5.7         9.7   25,623   24,097        6.3
  as % of sales                       80.2         82.3        84.6      78.8      77.4                           78.1     80.1
  Consumption of RM                  7,487        6,958       7,998     6,682     7,117      (4.9)        6.5   13,799   14,189      (2.8)
  as % of sales                       47.4         46.3        49.5      43.1      41.1                           42.0     47.2
  Employee Cost                      1,376        1,351       1,308     1,712     1,875      36.3         9.5    3,587    2,751       30.4
  as % of sales                        8.7          9.0         8.1      11.0      10.8                           10.9      9.1
  Other expenditure                  3,816        4,046       4,365     3,824     4,413      15.7       15.4     8,237    7,156       15.1
  as % of sales                       24.2         26.9        27.0      24.7      25.5                           25.1     23.8
  EBITDA                             3,666        3,182       3,021     3,695     4,376      19.4       18.4     8,072    7,045       14.6
  EBITDA (w/o Tech. income)          3,371        3,031       2,861     3,457     4,158      23.4       20.3     7,616    6,691       13.8
  Depreciation                         639         653         697       703       656        2.7       (6.6)    1,359    1,187       14.4
  EBIT                               3,027        2,529       2,325     2,993     3,720      22.9        24.3    6,713    5,857       14.6
  Other Income                         166         257         204       389       383      130.2       (1.4)     772      361       113.7
  Interest                                  3       29          18        43        24      750.0      (44.0)      66        4              -
  PBT                                3,190        2,757       2,510     3,339     4,079      27.9       22.2     7,418    6,214       19.4
  Total Tax                            560         430         370       666       850       51.7       27.6     1,515    1,110       36.5
  Adjusted PAT                       2,455        2,327       2,140     2,393     2,950      20.1       23.2     5,343    5,129        4.2
  APAT after MI                      2,455        2,327       2,140     2,393     2,950      20.1       23.2     5,343    5,129        4.2
  Extra ordinary items                      0        0           0         0         0                              0        0
  Reported PAT                       2,630        2,327       2,140     2,533     3,090      17.5        22.0    5,623    5,204        8.0
  AEPS                                 3.1          2.9         2.7       3.0       3.7      20.1       23.2       6.7      6.4        4.2


  Margins (%)                                                                               (bps)       (bps)                        (bps)
  EBIDTA                              22.4         20.5        18.1      23.2      24.6       218        139      24.0     22.6       133
  EBITDA (w/o Forex/Tech. inc.)       20.8         19.7        17.3      22.1      23.7       290        162      22.7     21.7       104
  EBIT                                19.2         16.8        14.4      19.3      21.5       232        218      20.5     19.5        98
  EBT                                 20.2         18.4        15.5      21.5      23.6       336        202      22.6     20.7       194
  PAT                                 15.5         15.5        13.2      15.4      17.0       149        159      16.3     17.1       (78)
  Effective Tax rate                  17.6         15.6        14.7      19.9      20.8       327         89      20.4     17.9       256


  Revenue breakup

  Rs mn                           Q2FY11        Q3FY11    Q4FY11      Q1FY12    Q2FY12    YoY (%)    QoQ (%)    YTD12    YTD11    YoY (%)
  Domestic                          7564          7340        6522      7436      8470     12.0%       13.9%    15907    14316     11.1%
  Total Exports                     8322          7818        9750      8302      9111      9.5%        9.7%    17412    15981      9.0%
    Export Formulation              6639          6432        7428      6589      7516     13.2%       14.1%    14104    12896      9.4%
    API                             1683          1386        2322      1713      1595      -5.2%      -6.9%     3308     3084      7.2%
  Total Sales                       15886        15158        16272    15738     17581     10.7%       11.7%    33319    30296     10.0%
    Technology Fees                  120           151         160        98       100     -16.5%      1.8%       198      279     -28.9%
    Other operating income           250           372         380       173       222     -11.3%      28.5%      395      715     -44.8%
  Total Income                      16256        15681        16812    16009     17903     10.1%       11.8%    33912    31290      8.4%




Emkay Research           14 November 2011                                                                                                   2
                                    Cipla Ltd                                                                    Result Update

                                     Quarterly trend

                                        21,000                                                                          26%
                                                                                                            23.7%
                                                                                                22.1%                   24%
                                        18,000
                                                       20.8%                                                            22%
                                        15,000
                                                                   19.7%
                                                                                                                        20%
                                        12,000
                                                                                  17.3%                                 18%
                                         9,000
                                                                                                                17.0%   16%
                                         6,000         15.5%       15.5%                       15.4%
                                                                                                                        14%
                                         3,000                                                                          12%
                                                                                  13.2%
                                                0                                                                       10%
                                                    Q2FY11       Q3FY11       Q4FY11        Q1FY12        Q2FY12

                                                                     Sales          EBITDA %            PAT %


                                    RPAT increased by 17% to Rs3.1bn YoY in Q2FY12 mainly due to
                                    ¾   19% improvement in operating performance

                                    ¾   Lower depreciation charge (up 3% YoY)

                                    ¾   Higher other income (up 130% YoY)

                                    Adjusted for forex gain of Rs140mn in Q2FY11 (gain of Rs175mn in Q2FY11), adj PAT
                                    increased by 20% to Rs2.9bn


                                    Valuations
                                    We expect Cipla to report 14% revenue growth in FY12 and 16% in FY13. We expect
                                    company’s base EBITDA margins to improve from 21.2% in FY11 to 21.5% in FY12 and
                                    22.5% in FY13 as utilization of recently created manufacturing capacities increases. On
                                    account of low visibility of growth going forward, we value the company at 17XFY13 EPS to
                                    arrive at a target price of Rs299 and maintain Hold rating. At CMP, the stock is trading at
                                    20X of FY12E and 16X of FY13E.

                                    Key risk to our call
                                    ¾   Higher traction from inhaler launch in CIS and South African markets and earlier than
                                        expected launch of combination inhalers in ROW

                                    ¾   Faster ramp-up in the domestic business




Emkay Research   14 November 2011                                                                                                3
                                                           Cipla Ltd                                                                       Result Update

 Cipla’s – Domestic Metrics

 Cipla’s therapeutic growth                                                    Field force productivity

                                                                                   6,000
                                  FY11 %          MAT      MAT           YoY
     Therapies                                                                                                                                      5.7
                              Contribution      Sep'11   Sep'10        Gr. %
     Respiratory                    28.4%        867.2    766.1        13.2%
                                                                                   5,000                                                            5.5
     Anti-infective                 20.7%        633.9    603.6        5.0%
     Gynecology                      9.8%        299.9    241.0        24.4%
                                                                                                                                                    5.3
     CVS                            12.2%        371.6    328.9        13.0%
     Gastro                          7.7%        236.2    219.3        7.7%        4,000
                                                                                                                                                    5.1
     NSAIDS                          2.7%         83.6      76.8       8.8%
     CNS                             2.4%        74.24    63.24        17.4%                                                                        4.9
     Dermatology                     1.6%         48.2      43.9       9.9%        3,000
     Anti-diabetes                   0.7%         20.8      17.4       19.3%                                                                        4.7
     Others                         13.8%        420.5    381.9        10.1%
     Acute                          59.2%       1808.1   1645.2         9.9%       2,000                                                            4.5
     Chronic                        40.8%       1248.0   1096.9        13.8%                 FY08            FY09          FY10           FY11
     Total Sales                   100.0%       3056.1   2742.2        11.4%
                                                                                                          Field force            Productivity
 x

 Sep’11 MAT growth for Cipla has been below industry average                   ¡   The company has hired ~500-1000 last quarter. Total MR strength is
                                                                                   now 6500-7000
 ¡     Acute segment which contributes 59% grew by 10%
                                                                               ¡   MR productivity declined due to higher base of MRs and lower growth
 ¡     Chronic segment which contributes 41% grew by 14%                           in the domestic market




 Growth drivers - Volume/ Price/ New launches                                  Top 10 brand performance

                                                    Total Gr. 14.4%
                                                                                                                          MAT          MAT
                                                                                Rs Cr          Therapy                                           YoY Gr.
                                                                                                                        Sep'11       Sep'10
               Total Gr. 11.4%
                                                           4.3                  Asthalin       Resp                       142           131        8.6%
                        1.1                                                     Seroflo        Resp                       113           102       11.1%
                        0.7
                                                           2.5                  Mtp kit        Gynaec                     108             67      61.2%
                                                                                Foracort       Anti-Infective              98             77      27.0%

                         9.6                                                    Novamox        Anti-Infective              91             96      -5.7%

                                                           7.6                  Ciplox         Anti-Infective              86             86       0.6%
                                                                                Aerocort       Resp                        85             77      11.1%
                                                                                Mt pill        Gynaec                      78             87     -10.6%
                                                                                Budecort       Resp                        66             59      11.6%
                        Cipla                            Industry
                                                                                Duolin         Resp                        65             56      15.5%
                      Vol Gr.       Price Gr.    New launches
                                                                                Total                                    931.9        837.5       11.3%


 ¡     Cipla’s growth for the period was below industry growth which was       ¡   Top 10 brands contribute 30% to the domestic formulation sales
       primarily led by strong volume uptake. Pricing pressures and lower
                                                                               ¡   MTP Kit registered strong growth with revenues growing at 1.6x YoY
       growth from new launches pulled the overall growth
                                                                                   during the period
 ¡     This was mainly due to increased competition in the domestic market
       both from local peers as well as MNCs

     Source: AIOCD, Emkay Research




Emkay Research                  14 November 2011                                                                                                           4
                                           Cipla Ltd                                           Result Update

  Financial snapshot

   Rs mn                                     FY10      FY11    YoY Gr.   FY12E   YoY Gr.   FY13E     YoY Gr.
         Domestic                           25111      28178      12%    31032      10%    34036        10%
         Export                             23205      26756      15%    30769      15%    36734        19%
   Formulation                              48316      54933      14%    61801      13%    70770        15%
         API                                 5801       6792      17%     8817      30%    11067        26%
   Gross Sales                              54117      61726      14%    70619      14%    81837        16%
         Less: Excise                         522        487      -7%      647      33%      745        15%
   Net Sales                                53595      61238      14%    69972      14%    81093        16%
         Technology Income                   1538        637     -59%      400     -37%      400         0%
         Other Operating Income               924       1304      41%     1465      12%     1769        21%
   Total Sales                              56057      63180      13%    71837      14%    83261        16%


   EBITDA                                   13742      13375      -3%    15444      15%    18765        22%
         EBITDA margin                      24.5%      21.2%             21.5%             22.5%


   EBITDA (excl. Tech. income)              12204      12738       4%    15044      18%    18365        22%
         EBITDA margin                      22.4%      20.4%             21.1%             22.2%


   PAT                                      10545       9564      -9%    11395      19%    14169        24%
         EPS                                  13.1      12.1      -8%     14.2              17.6        24%
         PE @ CMP                             21.9      23.9              20.3              16.3




Emkay Research          14 November 2011                                                                       5
                                                   Cipla Ltd                                                                Result Update

  Financials

  Income Statement                                                          Balance Sheet
  Y/E, Mar (Rs. mn)                   FY10      FY11    FY12E      FY13E    Y/E, Mar (Rs. mn)             FY10     FY11    FY12E    FY13E
  Net Sales                          56,057   63,180    71,863     83,325   Equity share capital          1,606    1,606    1,606    1,606
  Growth (%)                            7.1     12.7      13.7       16.0   Reserves & surplus           57,500   65,055   74,186   85,039
  Expenditure                        42,315   49,805    56,418     64,560   Net worth                    59,105   66,661   75,791   86,644
  Raw Materials                      24,530   29,146    32,829     37,170   Minority Interest                0        0        0        0
  SGA                                10,975   15,250    13,370     15,663   Secured Loans                    4      480      480      480
  Employee Cost                       3,191    5,410     5,460      6,087   Unsecured Loans                 47     5,239    5,239    4,239
  Other Exp                           3,620        0     4,760      5,640   Loan Funds                      51     5,719    5,719    4,719
  EBITDA                             13,742   13,375    15,444     18,765   Net deferred tax liability    1,792    2,131    2,131    2,131
  Growth (%)                           12.5      -2.7     15.5       21.5   Total Liabilities            60,948   74,511   83,641   93,495
  EBITDA margin (%)                    24.5     21.2      21.5       22.5
  Depreciation                        1,671    2,536     2,770      2,926   Gross Block                  28,973   42,411   44,487   52,982
  EBIT                               12,071   10,838    12,675     15,839   Less: Depreciation            8,861   11,465   14,279   17,697
  EBIT margin (%)                      21.5     17.2      17.6       19.0   Net block                    20,112   30,946   30,208   35,285
  Other Income                        1,075      794     1,397      1,544   Capital work in progress      6,842    2,853    2,853    2,853
  Interest expenses                    230        51      343        313    Investment                    2,464    5,904    5,904    5,904
  PBT                                13,263   11,709    13,728     17,071   Current Assets               43,673   46,599   56,998   63,875
  Tax                                 2,435    1,910     2,334      2,902   Inventories                  15,126   19,062   22,320   24,331
  Effective tax rate (%)               18.4     16.3      17.0       17.0   Sundry debtors               15,666   14,908   17,500   19,478
  Adjusted PAT                       10,545    9,692    11,395     14,169   Cash & bank balance            621     1,010    1,079    1,400
  (Profit)/loss from JV's/Ass/MI         0         0           0       0    Loans & advances             12,260   11,619   16,100   18,666
  Adjusted PAT after MI              10,545    9,692    11,395     14,169   Other current assets             0        0        0        0
  Growth (%)                            8.5      -8.1     17.6       24.3   Current lia & Prov           12,143   11,791   12,322   14,423
  Net Margin (%)                       18.8     15.3      15.9       17.0   Current liabilities           9,980    9,581    9,546   11,330
  E/O items                            346       128           0       0    Provisions                    2,164    2,210    2,776    3,093
  Reported PAT                       10,828    9,799    11,395     14,169   Net current assets           31,530   34,808   44,676   49,452
  Growth (%)                           40.4      -9.5     16.3       24.3   Misc. exp & Def. Assets          0        0        0        0
                                                                            Total Assets                 60,948   74,511   83,641   93,495


  Cash Flow                                                                 Key Ratios
  Y/E, Mar (Rs. mn)                   FY10      FY11    FY12E      FY13E    Y/E, Mar                      FY10     FY11    FY12E    FY13E
  PBT (Ex-Other income)              12,188   10,915    12,332     15,526   Profitability (%)
  Depreciation                        1,671    2,536     2,770      2,926   EBITDA Margin                  24.5     21.2     21.5     22.5
  Interest Provided                    230        51      343        313    Net Margin                     18.8     15.3     15.9     17.0
  Other Non-Cash items                   0         0           0       0    ROCE                           22.8     17.2     17.8     19.6
  Chg in working cap                 -1,310    -2,889   -9,799     -4,111   ROE                            21.1     15.6     16.0     17.5
  Tax paid                           -2,285    -1,910   -2,334     -2,902   RoIC                           24.1     18.8     18.3     20.2
  Operating Cashflow                 10,493    8,703     3,311     11,753   Per Share Data (Rs)
  Capital expenditure                -5,037    -9,381   -5,700     -6,500   EPS                            13.1     12.1     14.2     17.6
  Free Cash Flow                      5,456     -678    -2,389      5,253   CEPS                           14.8     15.1     17.6     21.3
  Other income                        1,075      794     1,397      1,544   BVPS                           73.5     82.9     94.3    107.8
  Investments                        -1,664    -3,440          0       0    DPS                             2.3      2.1      3.3      4.1
  Investing Cashflow                 -5,625   -12,027   -4,303     -4,956   Valuations (x)
  Equity Capital Raised               6,656      293      -293         1    PER                            21.9     23.9     20.3     16.3
  Loans Taken / (Repaid)             -9,352    5,668           0   -1,000   P/CEPS                         19.5     19.1     16.3     13.5
  Interest Paid                        -230       -51     -343       -313   P/BV                            3.9      3.5      3.1      2.7
  Dividend paid (incl tax)           -1,855    -1,697   -2,666     -3,315   EV / Sales                      4.1      3.7      3.3      2.8
  Income from investments                0         0           0       0    EV / EBITDA                    16.8     17.6     15.3     12.5
  Others                                 0      -500     4,363         0    Dividend payout (%)            17.3     15.0     20.0     20.0
  Financing Cashflow                 -4,781    3,713     1,060     -4,628   Gearing Ratio (x)
  Net chg in cash                       88       390       69       2,169   Net Debt/ Equity               -1.0      7.1      6.1      3.8
  Opening cash position                533       621     1,010      1,079   Net Debt/EBIDTA                 0.0      0.3      0.3      0.2
  Closing cash position                621     1,010     1,079      3,248   Working Cap Cycle (days)       215      208      236      224



Emkay Research             14 November 2011                                                                                                  6
                                                                         Cipla Ltd                                                                                                           Result Update



                                                                       Recommendation History: Cipla – CIPLA IN

                                                                         Date                 Reports                                                                  Reco                   CMP          Target

                                                                         26/09/2011           Pharma Sector Report_Domestic

                                                                         05/08/2011           Cipla Q1FY12 Result Update                                               Reduce                  303             283

                                                                         05/05/2011           Cipla Q4FY11 Result Update                                               Reduce                  303             255

                                                                         07/02/2011           Cipla Q3FY11 Result Update                                               Reduce                  324             310


                                                                       Recent Research Reports

                                                                         Date                Reports                                                                    Reco                   CMP         Target

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Emkay Research                 14 November 2011                                                                                                                                   www.emkayglobal.com

				
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