Q3FY18 RESULT UPDATE RETAIL EQUITY RESEARCH Cipla Ltd Pharmaceuticals BSE CODE: 500087 NSE CODE: CIPLA Bloomberg CODE: CIPLA:IN SENSEX: 33,704 HOLD Rating as per Large cap 12months investment period CMP Rs602 TARGET Rs653 RETURN 9% 21 st February, 2018 India business and new launches in the US to drive growth Cipla is a leading global pharmaceutical company with 1,500 plus products across various therapeutic categories. It has presence in over 80 countries. Cipla reported ~7% revenue growth in Q3FY18 led by improvement in the domestic market post GST and better performance of South Africa, Europe and API businesses. India formulation business grew 15% in Q3FY18 due to re-stocking post GST implementation and launch of new in-licensed products. US revenues declined ~2% impacted by continued pricing pressure and lower contribution from limited competition drug launches during the quarter. EBITDA margin rose 230bps in Q3FY18 led by gross margin improvement on back of better geography and product mix and cost control measures. We lower our revenue estimates by 3%/2%/3% for FY18/19/20E due to decline in Emerging markets and continued competitive & pricing pressure in the US. Hence, we recommend Hold rating on the stock with a revised TP of Rs 653 based on 20.5x FY20E EPS. Revenue growth led by improved India performance Cipla reported 7% growth in revenue in Q3FY18 on the back of healthy domestic business performance. India business, accounted for more than a third of the total revenue, grew by 15% led by restocking post GST and launch of new in-licensed products. Further, healthy growth across businesses (South Africa, API, Europe and Sub-Saharan Africa markets) supported revenue growth. Revenue from South Africa rose 7% in dollar terms led by strong growth in private market sement coupled with new launches from Anmarate acquisition. In the private market the company grew 11.1% as against market growth of 10.3%. Europe business recorded a robust 36% growth in Q3 largely driven by Salmeterol-Fluticasone (FPSM) sales. Also, the company received approval for generic Beclmethasone in the UK. Its APIs sales increased by 24% due to successful deliveries to key customers. We expect India business to grow at a CAGR of 12% over FY17-20E Key drug launches to drive US business US reported lower revenue, (down ~2% ) impacted by continued pricing pressure in the US market because of increased competition and less than expected contribution from the launch of two limited competition products-budesonide and Decitabine during the quarter. The company believes these products to gain ~15% market share by the end of Q4FY18. Overall, the company has 94 pending ANDAs including 27 tentative approvals. The company has filed 2 ANDAs in Q3FY18 taking total count to 10 filings in 9MFY18. The company is expected to file 10+ products in Q4. The company plans to launch 10-15 products every year from FY19 onwards with one differentiated (limited competition) product per quarter. We expect US business to grow at a CAGR of 11.5% over FY17-20E on the back of ramp-up of recent launches, strong pipeline, pick-up in quality filing (Targeting to file 20 plus ANDAs in FY18E) and key upcoming approvals. Further, with a focus to build a strong specialty portfolio, Cipla is considering foraying into neurology/respiratory therapy segments by acquiring a couple of Phase III/late Phase II assets in this space. EBITDA margin to improve by 430 bps to 21.5% in FY20E EBITDA margin improved by 230bps to 20.9% led by strong India growth and benefit of cost control measures. Adj. net profit surged 53% due to tax credit of Rs 1.1bn due to reduction in tax rate in the US. However, reported net profit rose just 7% as the company recorded impairment of certain intangible assets worth Rs174 crore in Q3FY18 on account of Invagen acquisition. The company has stepped up its investments in Research and Development which has resulted in approvals for differentiated products in the US and we expect R&D expenditure to increase further as the company begins clinical trials for some of its products. Despite higher R&D expenses, we expect EBITDA margin to improve by 430 bps over FY17-20E driven by traction in the US business and continuous cost rationalization measures adopted by Cipla. Outlook & Valuation. We expect revenue/adj. Pat CAGR of 12%/37% over FY17-20E on the back of key product approvals in the US along with improved domestic, South African and Europe business. However, continued pricing pressure in the US remains a concern. Hence, we recommend HOLD rating on the stock with a revised target price of Rs 653 based on 20.5x FY20E EPS. Company Data Market Cap (cr) Enterprise Value (cr) Rs48,450 Rs50,112 Outstanding Shares (cr) 80.5 Free Float 63% Dividend Yield 0.3% 52 week high Rs663 52 week low Rs479 6m average volume (cr) 0.2 Beta 1.2 Face value Rs2 Shareholding % Q1FY18 Q2FY18 Q3FY18 Promoters 37.3 37.3 37.2 FII s 21.1 22.3 23.4 MFs/Insti 16.1 15.2 14.6 Public 18.0 17.7 16.9 Others 7.5 7.5 7.9 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return - 6% 1% Absolute Sensex 1% 7% 18% Relative Return* (1%) (1%) (17%) *over or under performance to benchmark index Consolidated (Rs.cr) FY18E FY19E FY20E Sales 15,416 17,723 19,964 Growth (%) 7.1% 15.0% 12.7% EBITDA 3,044 3,592 4,299 Margin (%) 19.7% 20.3% 21.5% PAT Adj 1,702 2,051 2,566 Growth (%) 69.1% 20.5% 25.1% Adj.EPS 21.1 25.5 31.9 Growth (%) 69.0% 20.5% 25.1% P/E 28.5 23.6 18.9 P/B 3.3 3.0 2.6 EV/EBITDA 16.5 13.7 11.0 RoE (%) 12.4 13.3 14.6 D/E 0.2 0.2 0.1
Quarterly Financials (Consolidated) Profit & Loss Account (Rs cr) Q3FY18 Q3FY17 Growth % Q2FY18 QoQ Growth % 9MFY18 9MFY17 Growth % Revenue 3,914 3,647 7.3 4,082 (4.1) 11,521 11,048 4.3 EBITDA 819 678 20.8 804 1.8 2,270 1,970 15.2 EBITDA Margin (%) 20.9 18.6 234 bps 19.7 121 bps 19.7 17.8 187 bps Depreciation 349 258 35.3 256 36.3 818 691 18.4 EBIT 470 420 11.9 549 (14.3) 1,452 1,279 13.5 Interest 9 59 (84.6) 42 (78.2) 79 126 (37.3) Other Income 53 153 (65.5) 113 (53.3) 318 206 54.3 Exceptional Items 174-46 274.0 220 - PBT 340 514 (33.8) 573 (40.7) 1,470 1,359 8.2 Tax (64) 128 (150.1) 137 (146.7) 204 255 (20.2) PAT 404 386 4.8 436 (7.3) 1,266 1,103 14.8 Minority Interest 3.81 10.97 (65.3) 13.47 (71.7) 34 35 (2.4) Reported PAT 401 375 6.9 423 (5.2) 1,232 1,068 15.3 Adjustment (174) - (46) 274.0 (220) - Adj PAT 574 375 53.2 469 22.4 1,452 1,068 35.9 No. of shares (cr) 80.5 80.4 0.1 80.5 0.0 80.5 80.4 0.1 EPS (Rs) 7.1 4.7 53.0 5.8 22.4 18.0 13.3 35.8 Segment Revenue (Rs cr) Q3FY18 Q3FY17 QoQ Q2FY18 Growth % Growth % India 1601 1398 15.0 1646 (3.0) US 650 662 (2.0) 618 5.0 South Africa 870 820 6.0 921 (6.0) Emerging Markets 371 420 (12.0) 454 (18.0) Europe 171 131 30.0 151 13.0 APIs 148 120 24.0 212 (30.0) Others 103 97 6.0 80 29.0 Total sales 3,914 3,647 7.0 4,082 (4.0) Source: Company, Geojit Research
Consolidated Financials Profit & Loss Account Sales 13,595 14,394 15,416 17,723 19,964 % change 24.1% 5.9% 7.1% 15.0% 12.7% EBITDA 2,480 2,476 3,044 3,592 4,299 % change 14.7% -0.2% 23.0% 18.0% 19.7% Depreciation 754 1,323 1,148 1,037 1,113 EBIT 1,725 1,153 1,896 2,555 3,186 Interest 207 159 120 100 79 Other Income 208 229 350 193 193 PBT 1,727 1,222 2,125 2,648 3,300 % change 9.0% -29.2% 73.9% 24.6% 24.6% Tax 332 180 383 556 693 Tax Rate (%) 19.2% 14.7% 18.0% 21.0% 21.0% Reported PAT 1,360 1,006 1,922 2,051 2,566 Adj* - - 220 - - Adj PAT 1,360 1,006 1,702 2,051 2,566 % change 22.3% -26.0% 69.1% 20.5% 25.1% No. of shares (mn) 80.3 80.5 80.5 80.5 80.5 Adj EPS (Rs) 16.9 12.5 21.1 25.5 31.9 % change 22.3% -26.1% 69.0% 20.5% 25.1% DPS (Rs) 2.0 2.0 2.0 2.0 2.0 Balance Sheet Cash 871 624 1,121 1,334 2,383 Accounts Receivable 2,356 2,497 2,668 3,075 3,469 Inventories 3,808 3,485 3,642 4,225 4,527 Other Cur. Assets 1,223 1,362 1,468 1,615 1,766 Investments 758 973 1,323 1,523 1,723 Gross Fixed Assets 7,463 8,629 10,512 11,312 12,112 Net Fixed Assets 6,664 6,795 7,530 7,293 6,981 CWIP 2,061 1,683 600 600 600 Intangible Assets - - - - - Def. Tax (Net) (897) (589) (457) (157) 142 Other Assets 3,308 3,365 3,365 3,365 3,365 Total Assets 20,152 20,196 21,259 22,873 24,955 Current Liabilities 2,951 2,981 3,099 3,418 3,691 Provisions - - - - - Debt Funds 5,192 4,113 3,513 2,913 2,313 Other Liabilities 144 139 139 139 139 Equity Capital 161 161 161 161 161 Reserves and Surplus 11,356 12,365 13,873 15,730 18,102 Shareholder s Fund 11,516 12,525 14,034 15,891 18,263 Minority Interest 350 438 475 512 549 Total Liabilities 20,152 20,196 21,259 22,873 24,955 BVPS (Rs) 147.7 161.1 180.2 203.8 233.7 Cash flow Pre-tax profit 1,727 1,222 2,121 2,644 3,296 Depreciation 754 1,323 1,148 1,037 1,113 Changes in W.C (429) 231 (447) (1,118) (873) Others 197 57 (230) (93) (114) Tax paid (508) (450) (383) (556) (693) C.F.O 1,741 2,382 2,210 1,914 2,729 Capital exp. (1,077) (1,136) (800) (800) (800) Change in inv. 10 (41) (350) (200) (200) Other invest.cf (3,456) (136) 350 193 193 C.F - investing (4,523) (1,313) (800) (807) (807) Issue of equity 3 12 0 - - Issue/repay debt 3,442 (1,080) (600) (600) (600) Dividends paid (161) (194) (194) (194) (194) Other finance.cf (185) (44) (120) (100) (79) C.F - Financing 3,099 (1,307) (914) (893) (873) Chg. in cash 317 (237) 496 213 1,049 Closing cash 871 624 1,121 1,334 2,383 Ratios Y.E March FY16 FY17 FY18E FY19E FY20E Profitab. & Return EBITDA margin (%) 18.2 17.2 19.7 20.3 21.5 EBIT margin (%) 14.2 9.6 14.6 15.5 16.9 Net profit mgn.(%) 10.0 7.0 11.0 11.6 12.9 ROE (%) 11.9 8.1 12.4 13.3 14.6 ROCE (%) 13.0 8.1 12.8 14.7 16.7 W.C & Liquidity Receivables (days) 64 64 64 64 64 Inventory (days) 273 239 243 243 243 Payables (days) 48 48 48 48 48 Current ratio (x) 3.0 3.0 3.3 3.4 3.7 Quick ratio (x) 1.7 1.8 2.1 2.2 2.5 Turnover &Levg. Gross asset T.O (x) 1.8 1.7 1.6 1.6 1.7 Total asset T.O (x) 0.7 0.7 0.7 0.8 0.8 Adj. debt/equity (x) 0.4 0.3 0.2 0.2 0.1 Valuation ratios EV/Sales (x) 3.9 3.7 3.3 2.8 2.4 EV/EBITDA (x) 21.1 20.8 16.5 13.7 11.0 P/E (x) 35.6 48.1 28.5 23.6 18.9 P/BV (x) 4.1 3.7 3.3 3.0 2.6
Recommendation Summary (last 3 years) Dates Rating Target 18-Jan-17 HOLD 563 28-Nov-17 BUY 684 21-Feb-18 HOLD 653 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is above 10%. Buy - Upside is above 15%. Hold - Upside is between 0% - 10%. Accumulate - Upside is between 10% - 15%. Reduce - Downside is more than 0%. Hold - Upside is between 0% - 10%. Neutral - Not Applicable Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk have reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhishek Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.
REGULATORY DISCLOSURES: Dion is engaged in the business of developing software solutions for the global financial services industry across the entire transaction lifecycle and interalia provides research and information services essential for business intelligence to global companies and financial institutions. Dion is listed on BSE Limited (BSE) and is also registered under the SEBI (Research Analyst) Regulations, 2014 (SEBI Regulations) as a Research Analyst vide Registration No. INH100002771. Dion s activities were neither suspended nor has it defaulted with requirements under the Listing Agreement and / or SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with the BSE in the last five years. Dion has not been debarred from doing business by BSE / SEBI or any other authority. In the context of the SEBI Regulations, we affirm that we are a SEBI registered Research Analyst and in the course of our business, we issue research reports /research analysis etc that are prepared by our Research Analysts. We also affirm and undertake that no disciplinary action has been taken against us or our Analysts in connection with our business activities. In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision: 1. Disclosures regarding Ownership Dion confirms that: (i) It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein at the time of publication of this report. (ii) It/its associates have no actual / beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. Further, the Research Analyst confirms that: (i) He, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject company at the time of publication of this report. (ii) He, his associates and his relatives have no actual/beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. 2. Disclosures regarding Compensation: During the past 12 months, Dion or its Associates: (a) Have not managed or co-managed public offering of securities for the subject company (b) Have not received any compensation for investment banking or merchant banking or brokerage services from the subject company (c) Have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject (d) Have not received any compensation or other benefits from the subject company or third party in connection with this report. 3. Disclosure regarding the Research Analyst s connection with the subject company: It is affirmed that I, Abhishek Kumar Das employed as Research Analyst by Dion and engaged in the preparation of this report have not served as an officer, director or employee of the subject company 4. Disclosure regarding Market Making activity: Neither Dion /its Research Analysts have engaged in market making activities for the subject company. Copyright in this report vests exclusively with Dion. Please ensure that you have read the Risk Disclosure Documents for Capital Market and Derivatives Segments as prescribed by the Securities and Exchange Board of India before investing. Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom, Kochi-682024, Kerala, India. Phone: +91 484-2901000, Fax: +91 484-2979695, Website: geojit.com. For investor queries: customercare@geojit.com, For grievances: grievances@geojit.com, For compliance officer: compliance@geojit.com. Corporate Identity Number: L67120KL1994PLC008403, SEBI Regn.Nos.: NSE: INB/INF/INE231337230 I BSE:INB011337236 & INF011337237 MSEI: INE261337230, INB261337233 & INF261337233, Research Entity SEBI Reg No: INH200000345, Investment Adviser SEBI Reg No: INA200002817, Portfolio Manager:INP000003203, NSDL: IN-DP-NSDL-24-97, CDSL: IN-DP-CDSL-648-2012, ARN Regn.Nos:0098, IRDA Corporate Agent (Composite) No.: CA0226. Research Entity SEBI Registration Number: INH200000345