Maintain buy on Cipla: Espirito Santo

Mumbai | Updated: May 31 2014, 18:00pm hrs
Cipla's Q4FY14 results, published on Thursday, disappointed as an inline performance from the core domestic formulations was offset by lower export formulations, even as gross margin declined by 90bps qoq driven by a higher proportion of ARV tenders.

The bigger disappointment was on Ebitda margins, which declined to about 16.3% (-190bps qoq), owing to higher R&D spend in Q4 (+100bps qoq), resulting in a sharp c.20% miss on PAT vs consensus.

However, with R&D now 5.4% of sales and SG&A and personnel investments at their peak in our view, Q4 should represent trough margins, particularly, as the Medpro acquisition starts to contribute materially (c.22% EBITDA in Q4).

We also see Ciplas respiratory portfolio driving growth in FY15E and beyond driven by 3 nebulised launches in the US in FY15, Dymista scale-up and the launch of Advair pMDI in the UK. We cut our FY15E EPS by about 8% and re-iterate our Buy rating with an unchanged FV of R460.

Ciplas Q4FY14 results released were mixed as revenues came in line with our expectations, driven by domestic and export formulation performance (+19% and +34% y-o-y.

However, gross margins contracted by 90bps qoq primarily due to a higher proportion of ARV tenders in the quarter, which was reflected both in standalone (triple-cocktail supplies) as well as Medpro gross margins (2-in-1s).

In our view, Ciplas inhaler franchise and stable earnings model should drive sustainable growth over the longer term. Cipla is trading at 18x FY15E EPS, at a 10% discount to its peers. We cut our FY15 EBITDA and EPS estimates by 8% each. Our valuation remains unchanged at R460 driven by no major changes in our core EPS. Maintain buy.

- Espirito Santo