Cipla BUY - bsmedia.business-standard.com

Cipla – BUY

Focussed on sustainable margin/RoIC expansion

Financial summary (Rs m)

Y/e 31 Mar, Consolidated FY20A FY21A FY22ii FY23ii FY24ii

Revenues (Rs m) 171,320 191,596 219,492 236,455 268,401

Ebitda margins (%) 18.7 22.2 22.8 25.2 27.8

Pre-exceptional PAT (Rs m) 15,465 24,049 29,195 35,819 46,022

Reported PAT (Rs m) 15,465 24,049 27,948 35,819 46,022

Pre-exceptional EPS (Rs) 19.2 29.8 36.2 44.4 57.0

Growth (%) 1.2 55.5 21.4 22.7 28.5

IIFL vs consensus (%) 3.1 6.5 13.6

PER (x) 46.9 30.2 24.8 20.2 15.8

ROE (%) 9.9 13.9 14.8 15.9 17.4

Net debt/equity (x) 0.0 (0.1) (0.2) (0.3) (0.4)

EV/Ebitda (x) 22.9 16.6 13.7 11.0 8.3

Price/book (x) 4.5 3.9 3.5 3.0 2.5

OCF/Ebitda (x) 1.0 0.9 0.6 0.6 0.6

Source: Company, IIFL Research. Priced as on 23 August 2021

Rahul Jeewani | [email protected]

91 22 4646 4673

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CMP Rs898

12-mth TP (Rs) 1100 (22%)

Market cap (US$m) 9,764

Enterprise value(US$m) 9,528

Bloomberg CIPLA IN

Sector Pharma

Shareholding pattern (%)

Promoter 36.7 Pledged (as % of promoter share) 0.0

FII 24.8 DII 16.3

52Wk High/Low (Rs) 997/702

Shares o/s (m) 807

Daily volume (US$ m) 41.4

Dividend yield FY22ii (%) 0.2

Free float (%) 63.3

Price performance (%)

1M 3M 1Y

Absolute (Rs) (5.2) (3.1) 18.1

Absolute (US$) (5.0) (4.9) 19.1

Rel. to Sensex (10.1) (13.0) (26.5)

Cagr (%) 3 yrs 5 yrs

EPS 17.3 12.0

Stock performance

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Company update

FY21 Annual Report Analysis

24 August 2021

Cipla has defined 10 Strategic Business Objectives in its FY21 AR,

with the company maintaining focus on superior execution across its branded home markets of India & SA and portfolio expansion in

the US respiratory & complex generics space. While Albuterol market-share ramp-up has allowed Cipla to maintain steady US

sales as against the sharp erosion witnessed by peers, the recent Brovana launch along with upcoming launches (Qvar, Abraxane &

Advair) will drive further traction in the US business over the next 2-3 years. Factoring of trade receivables has driven significant

reduction in WCap intensity, thereby enabling Cipla to generate

USD680m cumulative FCF during FY20 & FY21. We expect the strong US product launch momentum to drive cumulative FCF of

USD1.3bn over FY22-24ii and RoIC to improve to 20/26% in FY23/24ii. Cipla remains our top-pick among large-cap pharma.

US growth driven by Cipla’s DTM business: Cipla’s US business has grown at 10% cc Cagr over FY18-21, as launches of complex generics and

respiratory products enabled it to ramp-up its DTM (own front-end) business, from ~USD80m in FY18 (20% of US sales) to ~USD305m in

FY21 (56% of US sales). While acquired InvaGen’s sales have remained

largely flat, the share of Cipla’s legacy B2B business has continued to decline. Cipla’s respiratory portfolio (Albuterol, Budesonide) has crossed

the USD100m sales-mark, accounting for 18% of its overall US business.

Respiratory & complex generics to drive 12% US revenue Cagr

(20% Cagr including Revlimid) over FY21-24ii: Although most Indian peers saw significant QoQ decline in US sales during 1QFY22, market-share

ramp-up in Albuterol has allowed Cipla to maintain steady US sales. The recent Brovana launch will also contribute annualised revenue of USD25-

30m. While Cipla expects to respond to USFDA’s CRL on gAdavir by Aug-21,

approval of two other respiratory products (Qvar, partnered asset) is also pending. Further, two more respiratory products are expected to soon enter

P-3 trials. The complex injectables pipeline includes 2 partnered peptide injectables filed in FY21 and the Abraxane launch scheduled in Sep-22.

Other key notables from FY21 AR: 1) Factoring of trade receivables has accounted for two-thirds of the improvement in Cipla’s receivable days over

FY20/21; 2) Lower travel & marketing spends contributed 210bps of margin

improvement in FY21, while reduced clinical trials & R&D sample spends aided margins by 140bps; 3) The China mfg. plant is ready for inspections.

rahul.jeewani@iif lcap.com

Cipla – BUY

2

Figure 1: Cipla has defined 10 Strategic Business Objectives (SBOs) in its FY21 AR…(contd.)

S. No SBO Key initiatives

1 Become a global lung leader across the care continuum - Cipla is the second largest inhaler selling company (MDI and DPI inhaler devices) globally

- Cipla launched Glycohale-FB in India: Worlds first triple-drug combination of Glycopyrronium, Formoterol, and Budesonide in A DPI form – for COPD management

- Cipla is targets increasing penetration in key markets to establish leadership in volume of inhalers sold

2 Demonstrate organisational agility, along with company's purpose of 'Caring for Life' and address global health threats such as AMR

- Cipla has more than 10 new and better antibiotics, with novel mechanisms of action, in its pipeline to treat infections caused by priority and critical pathogens

- Cipla's acquired product Elores (Ceftriaxone + Sulbactam + Disodium EDTA) has registered double-digit growth of 11% in FY21

3 Grow Cipla India and South Africa OTC to become a holistic wellness player

- Cipla Health business continues to expand its footprint across multiple, large OTC categories. Cipla is among the top three and fastest-growing OTC companies in the South Africa private market

- Varied portfolio consisting of Nicotex (Nicotine Replacement Therapy), Omnigel (Cream, Gels, Ointments & Pain relief Spray category), Cofsils (cough lozenges), Ciphands portfolio consisting of sanitisers, surface disinfectant sprays, antiseptic liquids, etc

- Focus will be to consumerise Cipla's other brands, for building deeper connections with patients

4 Focus on the complex generics and respiratory pipeline in the US, measured investments in the specialty business and divestments of non-core assets

- Cipla is now among the top 10 generic players by prescriptions in the US

- Cipla filed 10+ ANDAs in the US in FY21, including two partnered peptide injectable products

5 Continue to build scale and depth in branded home markets of India and South Africa

- One-India strategy is progressing well, with market-beating growth across branded prescriptions, trade generics and consumer health. Cipla ranks among top-2 players in the overall chronic business in India and 11 of the company's brands are among the top-100 pharma brands in India

- Expanded partnership with a) Boehringer Ingelheim to co-market three new oral anti-diabetics drugs (Empagliflozin; Empagliflozin + Metformin; Empagliflozin + Linagliptin) and b) Roche for marketing and distribution of oncology drugs (Trastuzumab, Bevacizumab, and Rituximab)

- Cipla continues to be the third-largest player in the South-Africa (SA) private market, growing at 10%, even when the market saw a decline of 1%. Cipla launched 31 new products in SA in FY21 and has entered into a partnership with Alvotech for commercialisation of five biosimilar products

6 Strengthen presence in existing emerging markets - Cipla has signed deals worth US$10m of annualised revenue, including: 1) first biosimilar deal of Bevacizumab in Europe, 2) Partnership with Ferring in Australia to promote its specialty Urology-Oncology drug portfolio, and 3) Partnership with Alvotech for marketing and distribution of four biosimilars in Australia and New Zealand markets

- Cipla intends to focus on key DTMs and new frontier markets (China and Brazil) for organic growth

Source: Company, IIFL Research


Cipla – BUY

3

Figure 2: …(contd.) Cipla has defined 10 SBOs in its FY21 AR

S. No SBO Key initiatives

7 Focus on digital and patient-centric initiatives as future pivots for business models

- Cipla has partnered with GoApptiv to broaden the reach of its crucial brands in tier-3 plus towns in India

- Cipla intends to leverage digital assets to move closer to patients and is also exploring partnerships with e-pharmacy and point-of-care devices to enable patient care continuum

8 Continuous improvement: Efficiencies to deliver fuel for growth - Cost efficiencies with targets to reduce product COGS through continued focus on new sources, de-specification, logistics and improved manufacturing efficiencies

9 Invest in Quality 4.0 to change the quality paradigm - Implementation of the culture-led transformation programme ‘Trust’ across Cipla manufacturing sites

- Cipla is focussing on building a Paperless lab (digitising operations and procedures) and Robotic Process Automations

10 Strengthen the talent pipeline and improve productivity - Flagship programmes launched to build talent fungibility, encourage mobility, build a pipeline of future managers


Figure 3: Cipla’s US business has clocked 10% cc Cagr over FY18-21, driven by its DTM (own front-end) business, which has ramped-up from ~USD80m in FY18 (20% of US sales) to ~USD305m in FY21 (56% of US sales)


Figure 4: Cipla’s DTM (own front-end) business now accounts for 56% of its overall US sales, while the share of Cipla’s legacy B2B business has continued to decline

North America sales split

Between business segments FY15 FY16 FY17 FY18 FY19 FY20 FY21

Cipla B2B 99% 90% 34% 27% 15% 10% 6%

Cipla DTM 1% 4% 10% 20% 43% 52% 56%

InvaGen 0% 7% 56% 54% 42% 38% 39%


Figure 5: Cipla's Respiratory & Complex Injectable pipeline for the US market

Product Current Status

gAdvair Cipla expects to respond to the USFDA’s CRL on gAdvair by Aug-21

Complex Respiratory asset (gQvar)

ANDA filed in Q1 FY21

Partnered inhalation asset ANDA filed in FY21

Complex inhalation asset 1 P-2 studies; development in progress

Complex inhalation asset 2 P-2 studies; development in progress

Partnered peptide injectable ANDA filed in H2 FY21

Partnered peptide injectable (NDA)

NDA filed in H2 FY21


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Cipla's North-America business-wise sales ramp-up (USD m)

Cipla B2B Cipla DTM InvaGen


Cipla – BUY

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Figure 6: Cipla’s pending ANDA pipeline includes 3 inhalation and 9 injectable assets


Figure 7: We expect Cipla’s US revenue to ramp-up, from ~USD550m in FY21 to ~USD725m by FY23ii, driven by the recent launch of Brovana along with the upcoming launches of Qvar, Abraxane and Revlimid

Cipla's US sales (USD m) FY21 FY22ii FY23ii FY24ii

Base business 553 561 577 595

Base erosion (21) (22) (28)

Albuterol incremental sales 21 (3) (8)

Brovana

15 30 32

Qvar

3 35 35

Abraxane

0 18 35

Revlimid

0 90 200

Advair

0 0 91

Total US sales 553 579 726 952

YoY growth

5% 25% 31%


Figure 8: US launches will drive strong operating leverage and enable Cipla to expand its US business Ebitda margins, from ~20% currently to ~32% over the next two years

US business (USD m) FY21 FY23ii Incremental over FY21-23

Revenue 553 726 173

Ebitda 111 232 121

US Ebitda margins 20% 32% 70%


Figure 9: Cipla’s market share (MS) in Albuterol has increased, from 12.5% in 4QFY21 to 16% currently

Albuterol (weekly MS) 9-Jul 16-Jul 23-Jul 30-Jul 6-Aug 13-Aug

Endo/Par (Proventil AG) 0.8% 0.7% 0.6% 0.5% 0.4% 0.4%

Prasco (Ventolin AG) 24.0% 23.8% 23.7% 23.4% 23.3% 23.1%

Teva (Proair AG) 30.8% 29.9% 29.8% 29.5% 28.7% 28.9%

Perrigo (gProair) 0.2% 0.2% 0.2% 0.2% 0.2% 0.1%

Lupin (gProair) 9.0% 9.9% 10.3% 10.8% 11.5% 11.4%

Cipla (gProventil) 15.1% 15.3% 15.5% 15.7% 15.8% 16.0%

Sandoz (g/AG Proventil) 0.7% 0.8% 0.8% 0.9% 0.9% 0.9%

Brands 19.4% 19.5% 19.1% 19.0% 19.3% 19.1%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Symphony, IIFL Research

Figure 10: Cipla’s MS in Brovana has ramped-up to >15% within 1.5 months of launch

Brovana (weekly MS) 2-Jul 9-Jul 16-Jul 23-Jul 30-Jul 6-Aug 13-Aug

Dainippon Sumitomo 76.9% 68.6% 63.6% 61.4% 58.2% 55.8% 53.0%

Cipla 3.7% 9.6% 11.8% 11.4% 15.5% 15.8% 15.5%

Glenmark 0.2% 1.2% 1.9% 1.7% 2.1% 2.4% 2.5%

Lupin 19.0% 19.8% 19.8% 20.4% 20.2% 20.9% 22.2%

Slate Run Pharma 0.3% 0.8% 3.0% 5.1% 4.0% 5.1% 6.8%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Symphony, IIFL Research

Oral Solids46

Injectables9

Inhalation3

Topical2

Ophthalmic2

Dosage form split of Cipla's 62 pending ANDAs (FY21)

Advair, Qvar, partnered asset


Cipla – BUY

5

Focussed on outperforming market growth in India and South

Africa (SA)

While the Covid portfolio led to 14% growth in Cipla’s India branded

Rx business (78% of India sales) in FY21, the One-India strategy has also led to strong performance in the trade generics and CHL

portfolio. Cipla’s trade generics business (17% of domestic sales)

grew 8% on a reported basis in FY21 and by 18% adjusted for brands transferred to the CHL business. Cipla’s SA business also saw

growth of 10% in ZAR terms in FY21, while the overall pharma

market in SA declined by 1%. Mgmt. intends to build further scale in India & SA markets through focus on the chronic, consumer

healthcare, OTC and private segments, and hence evolve into a

holistic wellness player in these markets. Figure 11: We estimate that Cipla’s base Prescription (Rx) business, Covid portfolio (Rx – Covid), Trade Generics (Gx) and Consumer Healthcare (CHL) contributed 67%, 11%, 17% and 5%, respectively to its India sales in FY21

Source: Company, IIFL Research; Note: * Branded Generics (Rx), Trade Generics (Gx), Consumer Health (CHL)

Figure 12: Although Cipla’s overall India branded Rx business grew 14% in FY21 on the back of the Covid portfolio, growth in its base Rx business (excluding Covid) was muted (-2% YoY) owing to Covid disruptions

Cipla India business - Segmental growth FY19 FY20 FY21

Rx - base biz 5% 9% -2%

Rx - Covid NM NM NM

Overall Rx 5% 9% 14%

Gx 15% -12% 8%

CHL NM 36% 80%

Cipla India formulations business 9% 5% 15%


Figure 13: Cipla is ranked #2 in the Chronic market in India, with a market-share of ~8%

Cipla's positioning in India market

Market Rank (FY21)

Market Share (FY21)

Cipla Growth (FY21)

Market Growth (FY21)

Overall 3 5.3% 7% 4%

Chronic 2 8.1% 12% 8%

Respiratory 1 24.6% 4% -8%

Cardiac 4 5.4% 10% 13%

Urology 1 14.8% 7% 4%


Figure 14: Respiratory, anti-infectives, cardiac and urology are the key therapies for Cipla in the domestic market


79% 76% 78%67%

11%

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Cipla India business - segmental sales split (%)

Rx - base biz Rx - Covid Gx CHL

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4%3% 7%

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Anti-infectives

Cardiac

Antiviral

Gastrointestinal

Urology

Antineoplast

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CNS

Pain

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Cipla's India business therapy sales split

Cipla's rank - 1st

Cipla's rank - 4th

Cipla's rank - 1st

Cipla's rank -3rd


Cipla – BUY

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Figure 15: We expect Cipla’s base India business (ex-Covid) to grow 22/10/10% in FY22/23/24ii which, including Covid sales, implies growth of +25/-2/+7% for Cipla’s overall India business over the next 3 years


Figure 16: Cipla’s private market business in SA, accounting for ~68% of the company’s SA business, continues to grow at 11-12% in local currency terms

Cipla South Africa (SA) business FY19 FY20 FY21

Cipla SA sales (ZAR m)

Private business 2,765 3,091 3,445

Tender business 1,483 1,508 1,621

Total SA sales 4,248 4,599 5,066

Total SA sales (Rs m) 21,560 22,030 23,010

Local currency growth

Private business 12% 12% 11%

Tender business -9% 3% 7%

Total SA sales 4% 8% 10%

Total SA sales (Rs m) 6% 2% 4%

SA sales split

Private business 65% 67% 68%

Tender business 35% 33% 32%

Total SA sales 100% 100% 100%


Mgmt. is targeting entering the new frontier markets of China

and Brazil, to strengthen presence in EMs

Cipla’s Emerging Markets (EMs) business accounts for 10% of its

overall revenue, with the business growing a solid 21% cc in FY21 to clock revenue of USD250m. Cipla has signed various deals worth

USD10m of annualised revenue to strengthen its presence in

existing EMs. These agreements include a) the first biosimilar deal of Bevacizumab in Europe, 2) partnership with Ferring in Australia to

promote its specialty Urology-Oncology drug portfolio, and 3)

partnership with Alvotech for marketing and distribution of four biosimilars in the Australia and New Zealand markets.

Figure 17: Cipla delivered strong growth of 17/21% cc in its EU/EMs business in FY21

Cipla overall revenue

split (Rs m) FY19 FY20 FY21 FY21 - YoY FY21 rev (USD m)

India 64,200 67,406 77,356 15% 1,045

North America 32,937 38,201 40,806 7% 553

South Africa and SAGA 31,693 30,844 34,496 12% 466

Emerging Markets 16,584 14,400 18,513 29% 250

Europe 6,753 7,806 9,817 26% 133

APIs 6,849 7,518 7,976 6% 108

Others 4,607 5,145 2,633 -49% 36

Total revenue 163,624 171,320 191,596 12% 2,588

Segmental revenue split FY19 FY20 FY21

India 39% 39% 40%

North America 20% 22% 21%

South Africa and SAGA 19% 18% 18%

Emerging Markets 10% 8% 10%

Europe 4% 5% 5%

APIs 4% 4% 4%

Others 3% 3% 1%

Total revenue 100% 100% 100%

Source: Company, IIFL Research; Note: SAGA: Sub-Saharan Africa and Cipla Global Access

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Cipla – BUY

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Cipla’s new manufacturing plant in China is almost ready for

regulatory inspections

Cipla intends to focus on key DTMs as also on new frontier markets

(China, Brazil and Spain), for organic growth in EMs and the EU. Cipla’s new manufacturing facility in China (located at Qidong, a city

near Shanghai) is almost ready for regulatory inspections, with the

facility set to commercialise nebulisation & other respiratory products in the China market. In FY20, Cipla had formed an 80:20

JV in China with Jiangsu Acebright Pharmaceutical Co where Cipla is

the majority partner, and the companies have already filed a couple of DMFs in the China market. Cipla also plans to build scale and

further deepen its presence in the two new front-end markets of

Brazil and Spain.

Lower travel & marketing spends contributed ~210bps of

Ebitda margin improvement in FY21, while reduced R&D clinical trials & sample spends aided margins by ~140bps

Cipla’s overall Ebitda margins expanded ~350bps in FY21 to 22.2%,

as the ~340bps decline in GMs (owing to lower export incentives this year and the one-off Cinacalcet revenue in the US in FY20) was

offset by lower R&D spends, reduced on-ground field activity in the

domestic market and cost-saving initiatives.

Export incentives declined from Rs2.52bn in FY20 to Rs973m in FY21

which impacted Cipla’s GMs by ~100bps in FY21. Travel and sales

promotion expenses moderated from Rs13.8bn in FY20 to Rs11.3bn in FY21 which aided the company’s Ebitda margins by ~210bps.

Additionally, reduced clinical trials and R&D sample spends (as

gAdvair clinical trials were completed in FY20) contributed to ~140bps of the margin expansion in FY21.

Figure 18: Cipla’s cost-savings across line items − Lower travel & marketing spends contributed ~210bps to Cipla’s Ebitda margin improvement in FY21, while reduced R&D clinical trials & sample spends aided margins by ~140bps

Source: Company, IIFL Research; Note: the GM impact is excluding the impact from lower export incentives; Sales & Promotion expenses – S&P expenses; Legal & Professional fees and Credit loss – L&P fees/CL

Although Cipla delivered Ebitda margins of 24.5% in 1QFY22 (vs.

22.2% in FY21), we estimate that the Covid portfolio contributed margins of ~290bps in 1QFY22 and the company’s base business

margins are currently trending at ~21.5%. We expect US product

launches (ex-Revlimid) to improve base-business margins to 23.5% by FY23ii, while Revlimid can incrementally contribute margins of

~170/270bps in FY23/24ii.

18.7%

-1.0%-2.4%

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Cipla's FY20-21 and FY21-23ii Ebitda margin trajectory


Cipla – BUY

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Sale of trade receivables has driven two-thirds of the

improvement in Cipla’s receivable days during FY20 & FY21

Cipla has securitised part of its trade receivables over the past 3

years, by entering into an arrangement with a bank for sale of its trade receivables at a certain discount. Cipla sold-off trade

receivables worth Rs4.5/4.7bn in FY20/21, representing ~11/14% of

its outstanding receivables, respectively. Cipla’s receivable days have declined from 93 in FY19 to 66 in FY21, with two-thirds of the

improvement in receivable days being driven by the sale/factoring of

receivables. Figure 19: Factoring of trade receivables has accounted for two-thirds of the improvement in Cipla’s receivable days over FY20 and FY21

Rs m FY18 FY19 FY20 FY21

Trade receivables on BS 31,025 41,507 38,913 34,457

Receivable days 74 93 83 66

Sale of trade receivables by Cipla 0 1,038 4,458 4,666

Trade receivables sold as % of outstanding receivables

0% 3% 11% 14%

Improvement in overall Receivable days

(10) (18) 10 17

Improvement in Receivable days led by sale of trade receivables

0 2 9 9


Figure 20: Cipla’s receivable days have declined from 93 in FY19 to 66 in FY21, with two-thirds of the improvement in receivable days being driven by the sale/factoring of receivables


Strong reduction in working capital has enabled Cipla to generate USD680m cumulative FCF over FY20 & FY21

Cipla’s overall NWC cycle has improved from 156 days in FY19 to

121 days in FY21, with ~75% of the improvement being driven by lower receivables and the remaining from lower other current assets.

Reduced working capital intensity has led to Ebitda-to-OCF

conversion improving from ~53% in FY18/19 to ~92% in FY20/21.

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Cipla's receivable days trajectory over FY19-21


Cipla – BUY

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Figure 21: Cipla’s overall NWC cycle has improved from 156 days in FY19 to 121 days in FY21, with ~75% of the WCap improvement over the past two years being driven by lower receivables

Days of sales FY15A FY16A FY17A FY18A FY19A FY20A FY21A

Receivable days 64 62 64 74 93 83 66

Inventory days 122 101 87 97 88 93 89

Other current assets 28 32 31 38 35 30 26

Payable days 47 39 39 51 43 49 39

Provisions 6 8 10 15 16 20 21

Net Working Capital days 161 148 132 144 156 137 121


Figure 22: Ebitda-to-OCF conversion for Cipla has improved, from ~53% in FY18/19 to ~92% in FY20/21, on the back of lower working capital intensity


The higher OCF enabled Cipla to generate ~USD680m cumulative

FCF over FY20 & FY21 as compared with ~USD240m over the

preceding two-year period. We believe strong new-product launch

momentum in the US business and continued traction in the branded home markets of India and SA will lead to cumulative FCF

generation of USD1.3bn over FY22-24ii, representing ~13% of the

company’s current market cap.

Figure 23: We expect the strong US product launch momentum and continued traction in India & SA to drive cumulative FCF generation of ~USD1.3bn for Cipla, over FY22-24ii


Strong cash generation has led to significant debt reduction

over the past two years; ND/Ebitda now stands at -0.55x

With Cipla’s cumulative FCF generation during FY20 and FY21 increasing ~180% over the preceding two-year period, the company

has been able to significantly reduce its gross debt from ~USD620m

in FY19 to ~USD240m in FY21. Cipla turned net-cash positive in FY21 with net-cash balance of ~USD260m, which has further

improved to ~USD400m as of 1QFY22. Net debt/Ebitda has also

improved from 0.51x in FY19 to -0.55x in 1QFY22.

70%

96%

52% 55%

96% 88%

64%61% 60%

0%

20%

40%

60%

80%

100%

120%

05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2ii

FY2

3ii

FY2

4ii

OCF (Rs mn) (LHS) OCF/Ebitda (RHS)

87%

57%50%

133% 121%

88%85% 84%

40%50%60%70%80%90%100%110%120%130%140%

0

100

200

300

400

500

600

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2ii

FY2

3ii

FY2

4ii

FCF (USD m) (LHS) FCF/PAT (RHS)


Cipla – BUY

10

Figure 24: Cipla turned net-cash positive in FY21, with net-cash balance of ~USD260m, which has further improved to ~USD400m as of 1QFY22

Cipla’s borrowings and cash

position (USD m) FY19A FY20A FY21A 1Q22A

Total Gross Debt 619 398 237 262

- InvaGen acquisition 543 275 138

- South Africa business 7 40 45

- WCAP loans 66 83 54

Total Cash & Cash Equivalents 393 285 498 664

Net Debt 225 112 -261 -402

Net Debt/Ebitda 0.51 0.25 -0.45 -0.55


RoE and RoIC (post-tax) expanded ~400-500bps in FY21;

RoIC will likely improve to >20% by FY23ii Strong Ebitda growth of 33% in FY21 (driven by 12% overall

revenue growth and ~350bps Ebitda margin expansion), along with

higher asset turnover, led to Cipla’s RoE improving from ~10% in FY20 to ~14% in FY21. RoIC also expanded, from ~12% (pre-

tax)/~9% (post-tax) in FY20 to ~19%/14%, respectively, in FY21.

We believe the strong new-product launch momentum in the US market will enable Cipla to further improve its RoIC (post-tax) to

~20%/26% by FY23/24ii.

Figure 25: Higher margins and asset turnover led to ~400bps improvement in Cipla’s RoE in FY21

DuPont analysis FY18A FY19A FY20A FY21A FY22ii FY23ii FY24ii

EBIT margins 9.9 10.8 11.9 16.6 17.7 20.1 22.9

Non. Op Effect 1.1 1.2 1.1 1.0 1.0 1.0 1.0

Tax Effect 0.9 0.7 0.7 0.7 0.8 0.7 0.7

Net Fixed Assets Turnover 1.8 2.1 2.3 2.6 3.1 3.6 4.6

Equity Multiplier 0.6 0.5 0.5 0.4 0.4 0.3 0.2

RoE 11.1 10.4 10.1 14.1 15.0 16.0 17.5


Figure 26: We believe strong new-product launch momentum in the US market will enable Cipla to further improve its RoIC (post-tax) to ~20%/26% by FY23/24ii


Cipla remains our top-pick among the large-cap pharma

companies; reiterate BUY with a TP of Rs1,100

Mgmt. has stated in the FY21 AR that Cipla will continue to focus on superior execution across markets, portfolio expansion and

continued cost discipline in FY22, in order to accelerate revenue

growth, drive sustainable margin expansion and maintain the high returns trajectory over the near-to-medium term.

Cipla remains our top-pick among large-cap pharma companies:

• We believe Cipla’s US business will continue to see improving

traction over the next 3 years, led by strong build-out in the

respiratory inhalation portfolio and other limited competition

launches. Continued traction in the US business will be driven by the recent Brovana launch and through launches of Qvar,

Abraxane, Revlimid & Advair over the next 18 months. We expect

Cipla’s US revenue to ramp-up, from ~USD550m in FY21 to ~USD725m in FY23ii, which will drive strong operating leverage

and enable Cipla to expand its US business Ebitda margins from

~20% currently to ~32% over the next two years.

14.2%

11.1% 10.2%7.7% 7.9% 7.7% 8.5%

13.9%

16.7%

20.2%

25.5%

5%

10%

15%

20%

25%

30%

FY1

4A

FY1

5A

FY1

6A

FY1

7A

FY1

8A

FY1

9A

FY2

0A

FY2

1

FY2

2ii

FY2

3ii

FY2

4ii

RoIC (post-tax)


Cipla – BUY

11

• While Cipla’s India business has significantly outperformed

market growth recently, led by the Covid drugs portfolio, we

believe Cipla’s One-India strategy will also continue driving

synergies and market-beating growth across its three business segments of branded generics, trade generics and consumer

healthcare. We expect Cipla’s base India business to grow 15%

YoY during 2Q-4QFY22ii, led by recovery in acute therapies and continued traction in the chronic & respiratory segment.

• We expect US product launches (ex-Revlimid) to improve Cipla’s

base-business Ebitda margins to 23.5% by FY23ii from 21.5% currently, while Revlimid is likely to incrementally contribute

margins of ~170/270bps in FY23/24ii. This would drive base-

business (ex-Revlimid) EPS Cagr of ~17% over FY21-24ii and overall earnings Cagr of ~24% over the next 3 years. We believe

RoIC (post-tax) will expand from ~14% in FY21 to ~26% (~22%

excluding Revlimid) in FY24ii. Figure 27: We expect Cipla’s base business EPS, excluding Revlimid, to clock 17% Cagr over FY21-24ii; overall EPS will likely compound at 24% Cagr over the next 3 years

Rs FY20A FY21A FY22ii FY23ii FY24ii 21-24ii CAGR

Base EPS 19.2 29.8 36.2 40.0 47.3 17%

Revlimid EPS 0.0 0.0 0.0 4.4 9.8

Total EPS 19.2 29.8 36.2 44.4 57.0 24%


Figure 28: Our TP of Rs1,100/share is based on 25x 2-yr fwd base business EPS and Rs50 per-share value for the Advair, Revlimid and partnered respiratory asset opportunity

Target Price (TP) calculation Rs

Total EPS 2-yr fwd (Jul-23) 48.6

Revlimid EPS 6.2

Core EPS 2-yr fwd (Jul-23) 42.4

Applied P/E on core business (x) 25

Target price of core business 1,050

Advair & partnered respiratory asset NPV 20

Revlimid NPV 30

Final target price 1,100



Cipla – BUY

12

Management

Glenmark, Dr Reddy's, Cadila, Lupin:

P/E EV/Ebitda

Background: Founded in 1935 by Khwaja Abdul Hamied, Cipla has established itself as a reliable and reputable pharmaceutical company in the home

markets of India, South Africa and North America. Cipla's product portfolio spans complex generics as well as drugs in the respiratory, anti-retroviral, urology, cardiology, anti-infective, CNS, and various other key therapeutic segments. Its products are distributed in more than 80 countries worldwide.

Cipla is the third-largest pharma company in the domestic formulations market, which contributes ~40% of its total revenue. Cipla is developing a comprehensive portfolio of respiratory products across varied dosage forms (MDI, DPI and nasal sprays) for the regulated markets of EU and the US.

Company snapshot

Name Designation

Samina Hamied Executive Vice-Chairperson

Umang Vohra MD and Global CEO

Kedar Upadhye Global CFO

3.0

7.0

11.0

15.0

19.0

23.0

27.0

Apr-10 Jul-12 Oct-14 Jan-17 May-19 Aug-21

12m fwd EV/EBITDA Avg +/- 1SD

(x)

Assumptions Y/e 31 Mar, Consolidated FY20A FY21A FY22ii FY23ii FY24ii

North America growth (%) 13.2 5.6 4.6 25.6 31.1

South Africa growth (%) 2.2 4.4 16.9 9.5 10.0

Europe growth (%) 15.8 21.5 14.9 15.1 13.0

EM business growth (%) (15.2) 27.5 0.3 10.1 10.0

Domestic growth (%) 5.0 14.8 25.2 (1.7) 6.5

EBITDA margin (%) 18.7 22.2 22.8 25.2 27.8

Tax rate (%) 29.0 27.0 28.2 28.0 28.0


9.0

15.0

21.0

27.0

33.0

39.0

45.0

Apr-10 Jul-12 Oct-14 Jan-17 May-19 Aug-21

12m fwd PE Avg +/- 1SD

(x)

India, 40.4

South Africa,

12.0

North America,

21.4

Europe, 5.2

RoW, 16.0

APIs/Others, 5.1

Revenue break-up (%) - FY21

0%

5%

10%

15%

20%

25%

0

50,000

100,000

150,000

200,000

250,000

FY16

A

FY17

A

FY18

A

FY19

A

FY20

A

FY21

A

Total operating revenue (LHS)

Growth rate (RHS)(Rs m)


Cipla – BUY

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Financial summary Income statement summary (Rs m) Y/e 31 Mar, Consolidated FY20A FY21A FY22ii FY23ii FY24ii Revenues 171,320 191,596 219,492 236,455 268,401 Ebitda 32,060 42,524 49,951 59,552 74,510 Depreciation and amortisation (11,747) (10,677) (11,033) (12,057) (13,107) Ebit 20,313 31,848 38,918 47,495 61,403 Non-operating income 3,442 2,660 2,213 3,010 3,028 Financial expense (1,974) (1,607) (1,053) (825) (601) PBT 21,782 32,901 40,077 49,680 63,831 Exceptionals 0 0 (1,246) 0 0 Reported PBT 21,782 32,901 38,831 49,680 63,831 Tax expense (6,312) (8,888) (10,941) (13,910) (17,873) PAT 15,470 24,013 27,890 35,769 45,958 Minorities, Associates etc. (5) 36 58 50 64 Attributable PAT 15,465 24,049 27,948 35,819 46,022

Ratio analysis Y/e 31 Mar, Consolidated FY20A FY21A FY22ii FY23ii FY24ii Per share data (Rs) Pre-exceptional EPS 19.2 29.8 36.2 44.4 57.0 DPS 4.0 5.0 2.0 2.0 2.0 BVPS 199.3 230.7 259.1 301.0 355.6 Growth ratios (%) Revenues 4.7 11.8 14.6 7.7 13.5 Ebitda 3.5 32.6 17.5 19.2 25.1 EPS 1.2 55.5 21.4 22.7 28.5 Profitability ratios (%) Ebitda margin 18.7 22.2 22.8 25.2 27.8 Ebit margin 11.9 16.6 17.7 20.1 22.9 Tax rate 29.0 27.0 28.2 28.0 28.0 Net profit margin 9.0 12.5 12.7 15.1 17.1 Return ratios (%) ROE 9.9 13.9 14.8 15.9 17.4 ROCE 11.8 16.9 18.5 20.4 22.5 Solvency ratios (x) Net debt-equity 0.0 (0.1) (0.2) (0.3) (0.4) Net debt to Ebitda 0.2 (0.5) (0.8) (1.2) (1.5) Interest coverage 10.3 19.8 36.9 NM NM Source: Company data, IIFL Research

Balance sheet summary (Rs m) Y/e 31 Mar, Consolidated FY20A FY21A FY22ii FY23ii FY24ii Cash & cash equivalents 20,204 36,876 57,881 84,123 128,139

Inventories 43,776 46,692 50,483 56,749 64,416

Receivables 38,913 34,457 39,509 42,562 48,312

Other current assets 14,168 14,071 18,210 20,246 24,079

Creditors 29,978 29,604 33,707 35,326 39,064

Other current liabilities 9,482 10,783 12,402 12,991 14,350

Net current assets 77,602 91,708 119,975 155,363 211,534

Fixed assets 59,526 59,252 54,219 48,162 41,055

Intangibles 44,305 44,375 44,375 44,375 44,375

Investments 4,545 4,237 2,991 2,991 2,991

Other long-term assets 11,188 11,560 11,560 11,560 11,560

Total net assets 197,166 211,132 233,120 262,451 311,514

Borrowings 28,164 17,556 16,509 12,012 17,059

Other long-term liabilities 8,429 7,720 7,720 7,720 7,720 Shareholders equity 160,573 185,856 208,891 242,719 286,735 Total liabilities 197,166 211,132 233,120 262,451 311,514

Cash flow summary (Rs m) Y/e 31 Mar, Consolidated FY20A FY21A FY22ii FY23ii FY24ii Ebit 20,313 31,848 38,918 47,495 61,403 Tax paid (8,483) (10,374) (10,941) (13,910) (17,873) Depreciation and amortization 11,747 10,677 11,033 12,057 13,107 Net working capital change 3,730 3,717 (7,262) (9,147) (12,154) Other operating items 3,377 1,685 0 0 0 Operating cash flow before interest 30,685 37,552 31,748 36,496 44,483 Financial expense (1,635) (1,207) (1,053) (825) (601) Non-operating income (2,631) (414) 2,213 3,010 3,028 Operating cash flow after interest 26,419 35,931 32,907 38,680 46,911 Capital expenditure (9,857) (7,914) (6,000) (6,000) (6,000) Long-term investments (321) (511) 0 0 0 Others 0 0 0 0 0 Free cash flow 16,241 27,506 26,907 32,680 40,911 Equity raising 1 1 0 0 0 Borrowings (16,842) (10,835) (1,047) (4,497) 5,047 Dividend (6,642) 0 (4,855) (1,942) (1,942) Net chg in cash and equivalents (7,242) 16,672 21,005 26,241 44,016 Source: Company data, IIFL Research


Cipla – BUY

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Disclosure : Published in 2021, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2021

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Cipla – BUY

15

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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 246 stocks rated in the IIFL coverage universe, 127 have BUY ratings, 9 have SELL ratings, 85 have ADD ratings and 23 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social

conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

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http://economictimes.indiatimes.com/markets/stocks/stock-quotes

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http://www.indiainfoline.com/

http://www.indiainfoline.com/


Cipla – BUY

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0200400600800

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Price TP/Reco changed date(Rs)

Cipla: 3 year price and rating history Date Close price

(Rs)

Target price

(Rs)

Rating

06 Aug 2021 945 1100 BUY

17 May 2021 904 1050 BUY 19 Jan 2021 802 1000 BUY

09 Nov 2020 790 900 BUY

10 Aug 2020 729 735 BUY 13 May 2020 570 600 BUY

11 Mar 2020 426 530 BUY

11 Sep 2019 475 520 ADD 06 Nov 2018 563 565 ADD

09 Aug 2018 633 600 ADD

Cipla BUY - bsmedia.business-standard.com

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