Given the ~25% discount to five-years’ average PE, current valuations offer an attractive entry point; upgraded to ‘Buy’
Market challenges in tender and Gx businesses at Cipla coupled with recent observations at Goa have led to 25% cut in consensus estimates and 40% correction in the stock price over the past one year. Though a branded franchise in India, private label in South Africa and generic business in the US are on track, volatile performance has led to valuation de-rating. However, following our recent interaction with the management, we believe the company’s performance will normalise from H2FY20 and accelerate from FY21 as:
(i) Gx business will rebound in Q2FY20 and normalise in H2FY20;
(ii) base will reset in the tender business in H2FY20;
(iii) launch of albuterol in early FY21 will offset gSensipar;
(iv) exclusivity in Atripta, Truvada and Viread with Teva in FY21; and
(v) gAdvair launch in FY22. Given the ~25% discount to five-years’ average PE, we perceive current valuations as an attractive entry point and upgrade to Buy.
Operational risks priced in
The sharp 40% correction in price is a culmination of several pain points: (i) realignment of distributors led to disruption in Gx business (~20% of India); (ii) fall in prices in TEE/TLD tender business in South Africa, though volumes rose; (iii) Ipca’s entry in malaria tender and decline in funding in global access; and (iv) Emerging Markets (EM), Iran and Yemen were impacted by trade barriers and currency fluctuations.
Near-term triggers offer attractive upside
We expect performance to normalise from H2FY20 and accelerate from FY21 as: (i) Gx business to rebound in Q2FY20 and normalise in H2FY20; (ii) base to reset in the tender business in H2FY20; (iii) launch of albuterol in early FY21 to offset gSensipar; (iv) exclusivity in API supply for gAtripta, gTruvada and gViread with Teva in FY21; (v) gAdvair filing by early 2020 and launch in FY22; (vi) conclusion of phase IIIb trials for IV tramadol with filing expected by CY19 & approval in CY20; (vii) US inhalers are from the Indore facility, which has regulatory clearance; (viii) and specialty pipeline comprising inhaled itraconazole, tizanidine patch, plazomicin and spasticity candidate is promising.
Outlook and valuation: Risks priced in; upgrade to ‘BUY’
Cipla has not traded at such attractive valuations (17.7x FY21e EPS) in the past five years and while all risks are priced in, we believe the pendulum has swung a tad too far. Hence, we upgrade to ‘BUY/SO’ from ‘HOLD/SP’ and retain our target price of Rs 500 (20x March 2021e EPS).