Cipla 4Q FY 2013

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Please refer to important disclosures at the end of this report 1

Y/E March (` cr) 4QFY2013 3QFY2013 % chg qoq 4QFY2012 % chg yoyNet sales 1,906 2,031 (6.1) 1,814 5.1Other income 119 93 27.5 90 31.4

Gross profit 1,162 1,233 (5.8) 1,042 11.5

Operating profit 349 453 (23.0) 347 0.5

Net profit 268 339 (21.0) 292 (8.3)Source: Company, Angel Research

For 4QFY2013, Ciplas numbers came in lower than expected on the bottom-

line as well as the sales front. The net sales and profits for the quarter came in at

`1,906cr (`2,057cr expected) and `268cr (`384cr expected), registering a

growth of 5.1% yoy and a dip of 8.3% yoy respectively. On the OPM front, the

margins dipped by 83bp yoy for the quarter at 18.3% vs 19.1% expected. For

FY2014, the management has given a revenue guidance of 12-14% yoy, with

EBITDA margins estimated to be around 21%-22%. We recommend a buy ratingon the stock.Results lower than expectations: For 4QFY2013, the company reportedlower-than-expected numbers on the bottom-line front. The net sales and profits

for the quarter came in at `1,906cr and `268cr, registering a growth of 5.1%

yoy and a dip of 8.3% yoy respectively. The gross margin and operating margin

came in at 60.9% and 18.3%. Consequently the net profit came in at `268cr,

lower than the expectations mainly on the back of the lower-than-expected

OPM and sales growth.

Outlook and valuation: For FY2014, the Management has given a revenuegrowth guidance of 12-14% and guided EBITDA margins to be at 21-22%. We

expect the companys net sales to post a 14.1% CAGR to`10,535cr and EPS to record

a 7.4% CAGR to`22.2 over FY201315E. We recommend a Buy on the stock.Key financials (Consolidated)Y/E March (` cr) FY2012 FY2013 FY2014E FY2015ENet sales 7,021 8,087 9,192 10,535% chg 14.5 15.2 13.7 14.6

Net profit 1,144 1,545 1,573 1,781% chg 25.2 35.0 1.8 13.2

EPS (`) 14.3 19.2 19.6 22.2EBITDA margin (%) 23.6 24.8 22.1 22.1

P/E (x) 26.9 19.9 19.5 17.3

RoE (%) 16.0 18.5 16.2 15.9

RoCE (%) 17.5 18.3 15.4 15.7

P/BV (x) 4.0 3.4 3.0 2.6

EV/Sales (x) 4.3 3.9 3.3 2.8

EV/EBITDA (x) 18.3 15.6 15.0 12.7

Source: Company, Angel Research

BUYCMP `383

Target Price `444

Investment Period 12 months

Stock Info

Sector

904

Bloomberg Code

Shareholding Pattern (%)

Promoters 36.8

MF / Banks / Indian Fls 15.7

FII / NRIs / OCBs 28.0

Indian Public / Others 19.5

Abs. (%) 3m 1yr 3yr

Sensex 7.2 23.9 19.9

Cipla 6.2 25.0 19.7

Pharmaceutical

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

Net Debt (`cr)

Face Value (`)

BSE Sensex

Nifty

Reuters Code

2

20,215

6,124

CIPL.BO

CIPLA@IN

30,751

0.6

435/301

174,040

Sarabjit Kour Nangra+91 22 3935 7600 Ext: 6806

[email protected]

CiplaPerformance Highlights

4QFY2013 Result Update | Pharmaceutical

May 30, 2013

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Cipla | 4QFY2013 Result Update

May 30, 2013 2

Exhibit 1:4QFY2013 ( Standalone) performanceY/E March (` cr) 4QFY2013 3QFY2013 % chg qoq 4QFY2012 % chg yoy FY2013 FY2012 % chg yoyNet sales 1,906 2,031 (6.1) 1,814 5.1 8,015 6,808 17.7Other income 118.9 93.3 27.5 90.5 31.4 416.2 318.1 30.8Total income 2,025 2,124 (4.7) 1,905 6.3 8,432 7,126 18.3Gross profit 1162 1233 (5.8) 1042 11.5 4952 3940 25.7

Gross margin 60.9 60.7 57.4 61.8 57.9

Operating profit 349 453 (23.0) 347 0.5 1932 1412 36.8

OPM (%) 18.3 22.3 19.1 24.1 20.7Interest 17.6 9.3 89.6 2.3 683.6 33.4 26.6 25.3

Depreciation 78 78 0.3 70 11.1 303 282 7.4

PBT 372 459 (19.0) 365 1.9 2012 1421 41.5

Provision for taxation 104 120 (13.2) 73 42.5 505 298 69.7

PAT before extra-ordinary item 268 339 (21.0) 292 (8.3) 1,507 1,124 34.1Extra-ordinary items/(income) 0 0 0 0 0PAT after extra-ordinary item 268 339 (21.0) 292 (8.3) 1,507 1,124 34.1EPS (`) 3.3 4.2 3.6 18.8 14.0


Exhibit 2:4QFY2013 Actual vs. Angel estimates(` cr) Actual Estimates VarianceNet sales 1,906 2,057 (7.3)Other income 119 90 31.4

Operating profit 349 520 (32.9)

Tax 104 146 (28.7)

Net profit 268 384 (30.4)Source: Company, Angel Research

Top-line growth in line of expectations

For 4QFY2013, Cipla reported a lower than expected top-line. The net sales came

in at`1,906cr vis--vis estimates of`2,057cr, registering a growth of 5.1% yoy.

The domestic formulation segment grew only by 5.2% yoy to `793cr. The

Management indicated that the weakness in domestic formulations was on account

of the lower off-take of the products on account of the new pricing policy, which

impacted the generic sales in the domestic markets. The branded formulation onthe other hand grew by 11% yoy during the quarter.

Exports dipped by 4.0% yoy during the period, mainly on back of the decline in the

API exports, which were lower by 24% yoy during the period. API exports were

impacted due to some large tenders in the African market having been delayed.

However, it indicated that Cipla Medpro had recently won a sizable tender and

growth could perk up going forward.

Overall exports came in at`1,128cr, contributing 58.7% to overall sales. The API

segment reported a 24.0% yoy dip to end the period at `175cr. Revenue of the

formulation exports segment stood at `954cr during the quarter, registering a

growth of 11.5% yoy.

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Exhibit 3:Sales trend

754

970 962 957

793

1,084

979

1,213

1,106 1,128

0

200

400

600

800

1,000

1,200

1,400

4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

(`cr)

Domestic Export


Operating profit margin dips

For 4QFY2013, the companys gross margin expanded by 353bp yoy to 60.9%.

However, higher rise in the staff expenditure, which rose by 40.1% yoy during the

quarter, led the OPM to end the quarter at 18.3% (19.1% in 4QFY2012) a dip of

83bp.

Exhibit 4:OPM trend

19.118.3

29.4

22.3

18.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


(%)


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Net profit much below expectations

For 4QFY2013, the companys net profit came in at `268cr, posting a dip of 8.3% yoy

growth lower than estimate of `384cr. Net profit growth came in lower than our estimates

on the back of lower than expected sales growth and OPM.

Exhibit 5:Net profit trend

292

400

500

339

268

0

50

100

150

200

250

300

350

400

450

500

550


(`cr)


Concall takeaways

For FY2014, the company has guided for a revenue growth of 12-14% yoy onsales.

EBDITA margin to be around 21-22% in FY2014. The company expects to close the Medpro acquisition in 2HFY2014; however,

as over 90% of Medpros products are already being supplied by Cipla, the

acquisition is unlikely to raise consolidated revenues significantly.

The company filed 5 ANDAs in FY2013 and plans to increase the number offiling in FY2014.

Tax rate guided at 24%-25% of PBT in FY2013-2014.

Recommendation rationale

Export segment to be the growth driver: Cipla exports to more than 180 countries,with growth coming through marketing alliances and distribution tie-ups in various

markets. Exports contributed 59% to the total turnover of FY2012, with Africa, US

and Latin America constituting more than 60% of total exports. In the US, Cipla

has entered into a partnership with more than 22 players and has a strong product

pipeline of ANDAs, of which 49 have been launched, while 30 are pending for

approval. Another long term growth driver for the company is the launch of the

CFC-free inhalers in the regulated markets. CFC-free inhalers in Europe and US

address a potential market size of more than US$3bn.

With the Medpro acquisition, the company now has a front end in the fast growing

African market and now has a front-end in the market like other pharma

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companies in the industry. The acquisition though will not add much, as majority

of the products of the company were already supplied by the company. Overall we

expect the companys exports to grow at a CAGR of 15.6% during FY2013-15.

Increasing penetration in the domestic market: Cipla is one of the largest playersin the domestic formulation market, with a market share of around 5%,

contributing 41% to the total turnover in FY2013. The company is the market

leader in key therapeutic areas such as respiratory care, anti-viral and urological.

Ciplas distribution network in India consists of a field force of around 7,500

employees. The company plans to increase its focus on domestic markets with new

therapies such as oncology and neuro-psychiatry in the offing. Cipla plans to focus

on growing its market share and sales by increasing penetration in the Indian

market, especially in rural areas and plans to expand its product portfolio by

launching biosimilars, particularly relating to the oncology, anti-asthmatic and

anti-arthritis categories. Overall we expect the companys domestic formulationbusiness to post a CAGR of 14.0% during FY2013-15.

Valuation: For FY2014, Ciplas Management has guided towards 12-14%+ salesgrowth and OPM of 21-22% for FY2014. We expect the companys net sales to

post a 14.1% CAGR to`10,535cr and EPS to record a 7.4% CAGR to`22.2 over

FY201315E. The stock is trading at 19.5x and 17.3x FY2014E and FY2015Eearnings, respectively. We recommend a Buy on the stock.Exhibit 6:Key assumptionsKey assumptions FY2014E FY2015EDomestic growth (%) 13.0 15.0Exports growth (%) 16.9 14.3

Growth in employee expenses (%) 20.0 20.0

Operating margins (excl tech. know-how fees) (%) 22.1 22.1


Exhibit 7:One-year forward PE band

-

100

200

300

400

500

600

Apr-06

Oct-06

May-07

Nov-07

Jun-08

Dec-08

Jul-09

Feb-10

Aug-10

Mar-11

Sep-11

Apr-12

Oct-12

May-13

(`)

Price 10x 15x 20x 25x


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Exhibit 8:Recommendation SummaryCompany Reco CMP Tgt. price Upside FY2015E FY12-15E FY2015E

(`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS(%) RoCE (%) RoE (%)Alembic Pharma. Neutral 134 - - 9.7 1.3 6.6 26.1 34.0 34.7Aurobindo Pharma Buy 177 264 49.0 9.2 1.1 7.0 58.2 12.0 18.0

Cadila Healthcare Buy 775 962 24.1 16.1 2.0 11.1 14.8 18.5 24.7

Cipla Buy 383 444 15.8 17.3 2.8 12.7 1.4 15.7 15.9Dr Reddy's Buy 2,105 2,535 20.4 16.6 2.4 12.1 10.8 18.3 21.8

Dishman Pharma Buy 75 206 174.7 3.4 0.8 3.9 47.9 12.0 13.7

GSK Pharma* Neutral 2,300 - - 27.6 5.3 18.7 4.8 36.1 31.0

Indoco Remedies Buy 63 78 23.8 8.1 0.8 5.4 15.8 15.3 14.7

Ipca labs Accumulate 599 676 12.8 13.3 1.9 9.0 30.6 26.0 25.3

Lupin Accumulate 768 877 14.2 18.4 2.4 11.3 29.1 28.5 24.8

Ranbaxy* Neutral 382 - - 17.0 1.1 8.8 (6.8) 13.1 19.1Sanofi India* Neutral 2,610 - - 26.3 2.6 15.8 13.4 15.9 16.7

Sun Pharma Neutral 1073 - - 27.0 6.0 14.6 15.8 29.4 22.0

Source: Company, Angel Research; Note: * December year ending

Background

Cipla is a leading pharmaceutical company in India with a strong presence in

both, the export and domestic markets. On the export front, where it follows the

partnership model, it has 5,700 product registrations in around 180 countries.

Cipla is a market leader in the domestic formulation market with over 5% market

share. Cipla is likely to continue on the growth trajectory owing to its entry into the

inhalers market in the EU and potential new long-term manufacturing contracts

with Global Innovators.

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Profit & loss statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EGross sales 5,410 6,180 7,129 8,152 9,333 10,697

Less: Excise duty 52.2 49.5 108.1 123.5 141.4 162.1Net sales 5,358 6,130 7,021 8,087 9,192 10,535

Other operating income 265 217 140 193 252 278

Total operating income 5,623 6,347 7,160 8,279 9,443 10,813% chg 7.4 12.9 12.8 15.6 14.1 14.5

Total expenditure 4,292 5,069 5,362 6,081 7,160 8,206

Net raw materials 2,453 2,747 2,739 2,953 3,355 3,845

Other mfg costs 445 635 705 641 738 846

Personnel 319 566 773 1,036 1,244 1,492

Other 1,075 1,121 1,145 1,451 1,824 2,023

EBITDA 1,066 1,061 1,659 2,005 2,031 2,328% chg 12.5 (0.4) 56.3 20.9 1.3 14.6

(% of Net Sales) 19.9 17.3 23.6 24.8 22.1 22.1

Depreciation & amortisation 167 254 312 330 336 366

EBIT 899 807 1,347 1,675 1,695 1,962% chg 12.9 (10.2) 66.8 24.4 1.2 15.7

(% of Net Sales) 16.8 13.2 19.2 20.7 18.4 18.6

Interest & other charges 23 17 38 34 34 34

Other Income 88 79 - 262 155 169

(% of PBT) 7.2 7.3 0.0 12.5 7.5 7.1

Recurring PBT 1,230 1,086 1,448 2,095 2,068 2,375% chg 8.9 (11.7) 33.3 44.7 (1.3) 14.8

Extraordinary expense/(Inc.) (95.0) - - - - -

PBT (reported) 1,325 1,086 1,448 2,095 2,068 2,375Tax 243.5 195.2 306.5 544.3 494.6 593.7

(% of PBT) 18.4 18.0 21.2 26.0 23.9 25.0

PAT (reported) 1,081 891 1,141 1,551 1,573 1,781Add: Share of earnings of asso. - 22 3 (6) - -

Less: Minority interest (MI) - - - - - -

Prior period items - - - - - -

PAT after MI (reported) 1,081 914 1,144 1,545 1,573 1,781ADJ. PAT 986 914 1,144 1,545 1,573 1,781% chg (1.8) (7.4) 25.2 35.0 1.8 13.2

(% of Net Sales) 20.2 14.9 16.3 19.1 17.1 16.9

Basic EPS (`) 12.3 11.4 14.3 19.2 19.6 22.2Fully Diluted EPS ( ) 12.3 11.4 14.3 19.2 19.6 22.2% chg 23.8 (7.4) 25.2 35.0 1.8 13.2

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Balance sheet (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EEquity share capital 161 161 161 161 161 161

Reserves & surplus 5,750 6,506 7,478 8,858 10,244 11,837Shareholders funds 5,911 6,667 7,641 9,019 10,408 12,001Minority interest - - - - - -Total loans 5.1 541.0 29.2 966.9 966.9 966.9

Other long term liabilities 30.0 30.0 30.0

Long Term Provisions 0.9 31.5 50.4 50.4 50.4

Deferred tax liability 179.2 213.1 233.2 280.5 280.5 280.5

Total liabilities 6,095 7,422 7,935 10,347 11,736 13,329APPLICATION OF FUNDSGross block 2,897 4,246 4,632 5,352 5,852 6,352

Less: acc. depreciation 886 1,147 1,411 1,742 2,078 2,444

Net block 2,011 3,100 3,221 3,610 3,774 3,908Capital work-in-progress 684 285 371 367 367 367Goodwill 10 10 10

Investments 246 590 1,269 2,532 2,532 2,532Long Term Loans and Advances 402 361 358 404 464

Current assets 4,367 4,221 4,130 4,780 6,118 7,733

Cash 62 96 90 143 879 1,728

Loans & advances 1,226 1,162 568 573 643 737

Others 3,079 2,963 3,471 4,063 4,596 5,267

Current liabilities 1,214 1,175 1,417 1,311 1,471 1,686

Net current assets 3,153 3,045 2,713 3,469 4,648 6,047Mis. Exp. not written off - - - - - -

Total assets 6,095 7,422 7,935 10,347 11,736 13,329

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Cash flow statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EProfit before tax 1,325 1,086 1,448 2,095 2,068 2,375

Depreciation 167 254 312 330 336 366(Inc)/Dec in Working Capital (131) (260) 367 (700) (490) (610)

Direct taxes paid 256 301 275 518 523 604

Cash Flow from Operations 1,105 780 1,853 1,208 1,391 1,527(Inc.)/Dec.in Fixed Assets (522) (950) (472) (716) (500) (500)

(Inc.)/Dec. in Investments (166) (344) (678) (1,264) - -

Other income - - - - - -

Cash Flow from Investing (688) (1,294) (1,150) (1,979) (500) (500)Issue of Equity 669 - - - - -

Inc./(Dec.) in loans (935) 537 (481) 987 - -

Dividend Paid (Incl. Tax) (155) (225) (187) (188) (188) (188)

Others 13 161 (41) 25 33 10

Cash Flow from Financing (408) 473 (709) 824 (155) (178)Inc./(Dec.) in Cash 9 (42) (6) 53 736 849

Opening Cash balances 53 62 96 90 143 879Closing Cash balances 62 96 90 143 879 1,728

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Key Ratio

Y/E March FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EValuation Ratio (x)P/E (on FDEPS) 31.2 33.7 26.9 19.9 19.5 17.3P/CEPS 24.6 26.3 21.1 16.4 16.1 14.3

P/BV 5.2 4.6 4.0 3.4 3.0 2.6

Dividend yield (%) 0.5 0.7 0.5 0.5 0.5 0.5

EV/Sales 5.7 5.0 4.3 3.9 3.3 2.8

EV/EBITDA 28.8 29.0 18.3 15.6 15.0 12.7

EV / Total Assets 5.0 4.1 3.8 3.0 2.6 2.2

Per Share Data (`)EPS (Basic) 12.3 11.4 14.3 19.2 19.6 22.2

EPS (fully diluted) 12.3 11.4 14.3 19.2 19.6 22.2

Cash EPS 15.5 14.5 18.1 23.4 23.8 26.7

DPS 2.0 2.8 2.0 2.0 2.0 2.0

Book Value 73.6 83.0 95.2 112.3 129.6 149.5

Dupont AnalysisEBIT margin 16.8 13.2 19.2 20.7 18.4 18.6

Tax retention ratio 81.6 82.0 78.8 74.0 76.1 75.0

Asset turnover (x) 1.0 1.0 0.9 0.9 0.9 1.0

ROIC (Post-tax) 13.5 10.3 14.3 14.1 12.6 13.5

Cost of Debt (Post Tax) 4.0 5.2 10.6 5.0 2.7 2.7

Leverage (x) 0.1 0.0 0.0 0.0 0.0 0.0

Operating ROE 14.4 10.4 14.4 14.4 13.1 13.5

Returns (%)ROCE (Pre-tax) 15.6 11.9 17.5 18.3 15.4 15.7

Angel ROIC (Pre-tax) 17.3 13.0 18.6 19.4 16.7 18.1

ROE 19.2 14.5 16.0 18.5 16.2 15.9

Turnover ratios (x)Asset Turnover (Gross Block) 2.0 1.8 1.6 1.7 1.7 1.8

Inventory / Sales (days) 94 98 102 93 104 115

Receivables (days) 111 88 81 71 80 88

Payables (days) 54 59 57 46 43 43

WC cycle (ex-cash) (days) 196 174 142 131 137 137

Solvency ratios (x)Net debt to equity (0.01) 0.1 (0.0) 0.1 0.0 (0.1)

Net debt to EBITDA (0.1) 0.4 (0.0) 0.4 0.0 (0.3)

Interest Coverage (EBIT / Int.) 39.2 - - - - -

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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Cipla

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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Documents

Cipla 4Q FY 2013