Initiate ‘sell’ on Cipla as risks outweigh likely rewards

By: | Published: July 2, 2015 12:16 AM

Cipla’s decade-long effort on inhaler development may finally bear fruit over the next five years.

Cipla’s decade-long effort on inhaler development may finally bear fruit over the next five years. However, based on management attrition and uncertainties in the inhalers space, the stock at CMP has limited room for an upside. Cipla has been late in developing complex generics and in establishing a front-end in the export markets.

Although the company will marginally benefit from these efforts in the next five years, we believe its RoCE will remain below its peers. Our FY20e revenue estimate is at $4 billion vs management guidance of $5 billion.

We value the stock at 23x FY17E EPS vs CMP-implied 22x given 35% earnings CAGR over FY15-18e, and expect Cipla to underperform front-line peers. We initiate coverage with ‘sell’.

We highlight uncertainties like substitutability, Cipla’s distribution capabilities (market share), distribution margins for partnered markets, acceptability of a generic in the inhaler space, US regulatory landscape, competitive landscape and labelling issues. Our primary data checks on the recent re-organisation of Cipla’s management are also less than buoyant.

The recent attrition in top management corroborates the view of our primary data checks.

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