Upgrade Cipla to ‘buy’ with target price of Rs 605

Published: December 27, 2018 2:23:41 AM

The management is still confident in achieving at least 10% revenue CAGR and 18-20% EBITDA margin over FY20-21E owing to the US, India, and SA segments (70% of revenues).

Cipla Medpro South Africa, cipla mumbaiAt present, the stock is trading at 23/17x FY20/21 P/E, at a 20% discount to its historical average.

By HDFC Securities

The recently diagnosed issues related to supply constraints in one of the sterile plants, US sanctions on Iran, war in Yemen, falling prices in the tender business and higher inflation in APIs are likely to persist over the next two-three quarters. However, the stock has also fallen ~23% from Rs 671/share (Sep18) and consensus earnings have been cut by 14-15%. The management is still confident in achieving at least 10% revenue CAGR and 18-20% EBITDA margin over FY20-21E owing to the US, India, and SA segments (70% of revenues). The injectable and inhaler launches in the US will be the key triggers.

At present, the stock is trading at 23/17x FY20/21 P/E, at a 20% discount to its historical average. We see this as a good opportunity to accumulate, with Cipla generating US$150mn+ FCFs annually on the back of robust branded franchises in India and South Africa. It is also consistently receiving complex product approvals in the US, which are likely to drive the top line and make the US business profitable. Upgrade to BUY with a TP of Rs 605 (22x Dec-20E EPS).

Cipla is facing multiple issues: (1) Supply constraints due to capacity rebalancing have cut quarterly sales by Rs ~1bn; (2) Iran and Yemen sales are expected to decline from US$70-80mn in FY18 to US$30-40mn for FY19E due to geopolitical concerns; and (3) The South Africa tender biz (40% of SA sales) could face double-digit price erosion. We expect these issues to normalise in FY20/21. Resolving supply constraints, acceleration in the US business and traction gained in India and SA branded businesses will drive revenue growth at 10% plus over FY20-21E. Cost rationalisation, ramp-up in the US, and rebalancing within segments will help maintain EBITDA margin at 18-20%.

Quarterly US sales to reach US$120- 130mn by FY19-end. The DTM is growing at double digits and should cross US$180-200mn in sales this year. B2B revenue slumped from US$150mn (FY18) to US$70mn now, having largely bottomed-out. The low-margin Invagen business is likely to remain flat. Lucrative launches over FY20-21 include gProventil, Tramadol, and potentially gAdvair. Domestic growth (12- 14%) will be led by in-licensed products and chronic therapies, with the acute portfolio remaining steady.

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