Cipla’sQ4FY15 Ebitda margin (16.4%) was below estimate with consolidation of acquired entities and bunching up of R&D diluting the leverage from strong growth. Exports growth and improvement in gross margin are key positives and the crux of our thesis. We believe FY16 guidance (15% growth, 150bps margin expansion) is conservative as its initiatives / pipeline start delivering. Operating leverage and mix will drive 42% EPS CAGR (highest in the sector) and multiple triggers will support premium valuations. Initial success with Advair MDI approvals (7 countries in EU, M/S gains) encourages us to add R100 per share of risk adjusted NPV for respiratory franchise to our target price.
Our revised target price is R750 from R770 earlier. We maintain ‘buy’. Cipla is our top large-cap conviction pick.
We cut our estimates to factor a muted Q4FY15, but forecast EPS to double over FY15-17 as operating leverage and mix benefits kick in.