Cipla Ltd Sep09 Results Updated Detailed...

Firstcall India Equity Advisors Pvt Ltd 1

Cipla Limited

BUY Target Price: Rs.370.00

CMP: Rs.321.60 Market Cap. : Rs.249979.68mn.

Date: November 26, 2009

Key Ratios:

Particulars FY09

(12 m)

FY10E

(12 m)

FY11E

(12 m)

OPM (%) 21 26 26

NPM (%) 15 18 18

ROE (%) 18 20 18

ROCE (%) 18 21 20

P/BV(x) 5.76 4.62 3.77

P/E(x) 32.18 23.50 20.51

EV/EBDITA(x) 22.60 18.24 17.88

Debt Equity ratio 0.22 0.19 0.17

Key Data:

Sector Pharma

Face Value Rs.2.00

52 wk. High/Low Rs.331.80/171.60

Volume (2 wk. Avg.) 465046

BSE Code 500087

SYNOPSIS • Cipla is the third largest pharma company in the domestic retail

market (ORG survey) and has presence in formulations and bulk

drugs manufacturing. It has a deep presence in the anti-

retroviral segment with a market share of 51%.

• The company has received tentative approval from the United

States Food & Drug Administration (USFDA) for marketing

Lopinavir/Ritonavir tablets in the strength of 200 mg and 500

mg.

• The company has launched Anti-flu to combat flu pandemic.

This is the only medicine from India to be Pre-qualified by WHO.

The drug will be sold under schedule X category.

• Cipla to raise Rs 6.75bn via QIP.

• The company will sell about 4% of its equity to institutional

investors to raise close to USD 175 million to fund its capital

expansion plans.

• The company has signed a long-term collaboration agreement

with Swiss specialty pharmaceutical major Meda, to develop

and market an anti-allergic rhinitis drug for various global

markets.

• The company will foray into the production of biotechnology

medicines soon.

• The company has successfully addressed all the nine

manufacturing deficiencies pointed out by the US Food and

Drug Administration (FDA) at its Bangalore manufacturing plant.

• The company’s top line and bottom line is expected to grow at a

CAGR of 16% and 20% over FY08 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]


Table of Content

Content Page No.

1. Investment Highlights 03

2. Peer Group Comparison 08

3. Key Concerns 08

4. Financials 09

5. Charts & Graph 11

6. Outlook and Conclusion 13

7. Industry Overview 14


Investment Highlights

• Result Updates (Q2FY10)

For the Second quarter, the top line of the company increased 7%YoY and stood at

Rs.14428.80mn against Rs.13546.90mn of the same period of the last year. The bottom

line of the company for the quarter stood at Rs.2757.40mn from Rs.1514.30mn of the

corresponding period of the previous year i.e., an increase of 82%YoY.

EPS of the company for the quarter stood at Rs.3.55 for equity share of Rs.2.00 each.


Expenditure for the quarter stood at Rs.10620.40mn, which is around 7% lower than the

corresponding period of the previous year. Raw material cost of the company for the

quarter accounts for 34% of the sales of the company and stood at Rs.4858.20mn from

Rs.4818.10mn of the corresponding period of the previous year i.e., an increase of 1%YoY.

Other Expenditure stood at Rs.3360.50mn from Rs.3329.90mn and accounts for 23% of

the revenue of the company for the quarter i.e., an increase of 1%YoY.

OPM and NPM for the quarter stood at 27% and 19% respectively from 17% and 11%

respectively of the same period of the last year.


Domestic sales for the quarter grew by about 7% while export sales grew by about 4%

during the quarter, exports of API and other grew by more than 37% whereas

formulations have gone down by about 3.5%. Material costs dipped from about 46% to

44% mainly due to changes in product mix which includes contribution of anti-retrovirals

segment.

• Cipla gets tentative USFDA nod for anti-HIV-1 drug

The company has received tentative approval from the United States Food & Drug

Administration (USFDA) for marketing Lopinavir/Ritonavir tablets in the strength of 200

mg and 500 mg. The drug is generic equivalent of Abbott Laboratories (ABT) Kaletra

tablets and falls under anti-retrovial (ARV) segment.

The drug is prescribed for the treatment of HIV-1 infection in adults and children above

the age of two years. The tablets are used together with other anti-retroviral agents.

• Cipla Launches Anti-Flu to Combat Flu Pandemic

The company has launched Anti-flu to combat flu pandemic. This is the only medicine

from India to be Pre-qualified by WHO. The drug will be sold under schedule X category.

• Cipla to raise Rs 6.75bn via QIP

The company has announced that its authorized committee of directors have decided to

close the bid period and has approved issuance of 2,56,30,000 equity shares of Rs 2 each

of the company at a price of Rs 263.75 a equity share (including a premium of Rs 261.75 a

equity share) under the QIP issue, aggregating to Rs 6,759,912,500.

Cipla has a product range comprising antibiotics, anti-bacterials, anti-asthmatics,

anthelmintics, anti-ulcerants, oncology, corticosteroids, nutritional supplements and

cardiovascular drugs. It is into anti-bacterial and anti-asthmatic segments and is the first

player in Asia to launch non-CFC metered dose inhaler.

• Cipla to sell 4% stake for USD 175mn

The company will sell about 4% of its equity to institutional investors to raise close to USD

175 million to fund its capital expansion plans.

The funds would be utilized for the ongoing expansions. The base amount of the share

sale is USD 110 million, with an option to raise it to USD 175 million.


• Cipla inks pact with Swiss pharma company

The company has signed a long-term collaboration agreement with Swiss specialty

pharmaceutical major Meda, to develop and market an anti-allergic rhinitis drug for

various global markets.

Under the terms of partnership, Cipla will manufacture the drug, which will treat an

ailment that causes a runny nose, and Meda will market the product in Europe, Japan,

Brazil, South Korea and Australia.

The partners are developing the product as a nasal spray to treat allergic rhinitis. The drug

is currently in the final phase of human clinical trials (Phase III) and the remaining clinical

studies are expected to be complete during the second half of 2010.

The drug under development is a combination of two drugs, Azelastine and fluticasone.

Azelastine is an anti-allergic drug and fluticasone is a corticosteroid, which is a class of

steroid hormones.

• Cipla to make biotech drugs

The company will foray into the production of biotechnology medicines soon.

The company is planning to set up a 50:50 joint venture partnership with a Chinese firm.

The JV will be based in India and will manufacture and market bio-similar products (off

patent biotechnology medicines) for domestic and overseas markets.

• USFDA clears Cipla's facilities

The company has successfully addressed all the nine manufacturing deficiencies pointed

out by the US Food and Drug Administration (FDA) at its Bangalore manufacturing plant.

The company received an official communication about the approval from the USFDA

about a month back.

In April this year, the FDA issued form FDA 483s — an inspection re-port pointing out

deviations from US manufacturing standards — and listed nine deficiencies.

If Cipla had failed to resolve any of the nine deviations, FDA could have issued a warning

letter and halted approval of new drug applications from the facility.

While the FDA has banned some drugs of Ranbaxy, it seized 33 drugs made by Caraco

Pharmaceuticals at its Michigan facility. Mumbai-based Lupin had also received a warning

letter in May this year after it failed to address some of the deficiencies FDA noted in an

inspection last year.


Although, Cipla’s problem is not as serious as its counterparts, as FDA merely pointed out

manufacturing deficiencies, it is the only Indian company in recent times to address the

non-compliance issues and get a clean chit from the FDA. Cipla’s US sales are small

accounting for about 10% of its total sales of Rs 5,000 cr. and it has four plants in India

which supplies drugs to the US.

• Cipla calls off marketing alliance with Avesthagen

The company has terminated its marketing agreement with Avesthagen and is looking at

selling its 5.8% stake in the Bangalore-based company.

Cipla terminated the agreement due to Avesthagen’s alleged failure to meet targets.

Under the agreement, Avesthagen was supposed to develop the biosimilar products and

Cipla would have used its strong marketing force to commercialize and market it. Cipla

was, however, not happy with the progress of Avesthagen’s research.

The company clear that it wants a presence in the biosimilar space and is close to

finalizing a deal with a Chinese partner. Chinese partners are coming to Mumbai and

finalizing the details then. Homework is already done and only the implementation is left.

First biosimilar product in the cancer space will be commercialized by the end of 2011.

Cipla is keen on partnering with a Chinese player for its biosimilar venture since the

Chinese are strong in this space. The products will be developed in China and

manufactured in India. Indian companies are strong in chemical research, while Chinese

companies are experienced in biologic research. Such collaboration is a good mix.

• Cipla plans to raise Rs 15 bn to retire debt, fund capex

The company plans to raise Rs 15 billion either by issuing foreign currency convertible

bonds or through global depository receipts (GDRs) to clear its debt as well as finance its

capital expenditure.

The company has debt of Rs 8 billion and plans to invest Rs 5-6 billion in the next two

years. It also requires Rs 3 billion of working capital for the next two years. The new plant

at the SEZ in Indore is also under construction. The money raise will be used for these

purposes.

The company is looking at opportunities in China to partner with a company in the

biosimilar space.

• Govt. plans retail clamp on Cipla's Tamiflu substitute


Free use, as with Tamiflu, risks virus mutation and resistance. The company launched a

substitute medicine for oseltamivir to treat swine flu, will have to withdraw the stocks of

this drug, zanamivir, from retail markets. The central government is to notify a ban on

retail sale of this medicine, the only drug other than oseltamivir that is used worldwide to

treat swine flu.

Peer Group Comparison

Name of the

company

CMP(Rs.)

(As on

November

26,2009)

Market Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

Cipla 321.60 249979.68 12.38 25.97 5.94 100.00

Dr.Reddy’s 1096.05 184953.30 40.55 27.03 3.52 125.00

Cadila 600.0 81913.10 26.50 22.65 6.64 90.00

Sun pharma 1455.00 301354.30 48.57 29.96 5.85 275.00

Key Concerns

• Recession in global economy

• Fluctuations in exchange rates

• High competition from global players

• Loss of marketing alliance(s),which could impair profitability

• Tighter margins due to rising inflation & pricing pressures in key markets.

• Tightening of the price controls or expanding the gambits of drugs under the price

regulations of the Indian government.


Financials

Results Update

12 months ended Profit and Loss A/C (Standalone):

Value(Rs in million) FY08A FY09A FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 42184.50 52570.20 58878.62 65944.06

Other Income 1197.60 697.50 627.75 659.14

Total Income 43382.10 53267.70 59506.37 66603.20

Expenditure -33574.80 -42208.80 -44158.97 -49128.32

Operating Profit 9807.30 11058.90 15347.41 17474.87

Interest -116.90 -339.60 -413.71 -455.08

Gross Profit 9690.40 10719.30 14933.70 17019.80

Depreciation -1306.80 -1706.10 -1962.02 -2158.22

Profit before Tax 8383.60 9013.20 12971.69 14861.58

Tax -1369.30 -1245.00 -2334.90 -2675.08

Net Profit 7014.30 7768.20 10636.78 12186.50

Equity Capital 1554.60 1554.60 1554.60 1554.60

Reserves 35913.90 41863.20 52499.98 64686.48

Face Value 2.00 2.00 2.00 2.00

Total No. of Shares 777.30 777.30 777.30 777.30

EPS 9.02 9.99 13.68 15.68


Quarterly ended Profit and Loss A/C (Standalone):

Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09E 31-Dec-09E

Description 3m 3m 3m 3m

Net Sales 13667.40 13760.40 14428.80 15005.95

Other Income 154.50 119.70 128.20 141.02

Total Income 13821.90 13880.10 14557.00 15146.97

Expenditure -10175.90 -10345.20 -10620.40 -11045.22

Operating Profit 3646.00 3534.90 3936.60 4101.76

Interest -132.70 -104.70 -83.60 -87.78

Gross Profit 3513.30 3430.20 3853.00 4013.98

Depreciation -556.60 -458.10 -478.10 -492.44

Profit before Tax 2956.70 2972.10 3374.90 3521.53

Tax -427.50 -555.00 -617.50 -644.33

Net Profit 2529.20 2417.10 2757.40 2877.20

Equity Capital 1554.60 1554.60 1554.60 1554.60

Face Value 2.00 2.00 2.00 2.00

Total No. of Shares 777.30 777.30 777.30 777.30

EPS 3.25 3.11 3.55 3.70


Charts

• Net sales & PAT

• P/E Ratio (x)


• P/BV (X)

• EV/EBITDA(X)


1 Year Comparative Graph

Outlook and Conclusion

• At the market price of Rs.321.60, the stock is trading at 23.50 x and 20.51 x for FY10E and

FY11E respectively.

• EPS of the company is expected to be at Rs.13.68 and Rs.15.68 for the earnings of FY10E and

FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 18.24 x and 17.88 x for FY10E and FY11E

respectively.

• The price to book value of the company is expected to be at 4.62 x and 3.77 x for FY10E and

FY11E respectively.

• The company’s top line and bottom line is expected to grow at a CAGR of 16% and 20% over

FY08 to FY11E.

• The company has received tentative approval from the United States Food & Drug

Administration (USFDA) for marketing Lopinavir/Ritonavir tablets in the strength of 200 mg

and 500 mg.

• The company has launched Anti-flu to combat flu pandemic. This is the only medicine from

India to be Pre-qualified by WHO. The drug will be sold under schedule X category.

Cipla Limited BSE SENSEX


• The company has announced that its authorized committee of directors have decided to close

the bid period and has approved issuance of 2,56,30,000 equity shares of Rs 2 each of the

company at a price of Rs 263.75 a equity share (including a premium of Rs 261.75 a equity

share) under the QIP issue, aggregating to Rs 6,759,912,500.

• The company will sell about 4% of its equity to institutional investors to raise close to USD 175

million to fund its capital expansion plans.

• The company has signed a long-term collaboration agreement with Swiss specialty

pharmaceutical major Meda, to develop and market an anti-allergic rhinitis drug for various

global markets.

• The company will foray into the production of biotechnology medicines soon.

• We recommend ‘BUY’ for this stock with a target price of Rs.370.00 for long term.

Industry Overview

The Indian pharmaceutical industry is driving product development and breaking new grounds in

medicine research worldwide. The Indian domestic pharmaceutical market was estimated to be

US$ 10.76 billion in 2008 and is expected to grow at a high compound annual growth rate (CAGR)

of 9.9 per cent till 2010 and thereafter at a CAGR of 9.5 per cent till 2015.

Currently, the Indian pharmaceutical industry is one of the world's largest and most developed,

ranking 4th in volume terms and 13th in value terms. The country accounted for 8 per cent of

global production and 2 per cent of world markets in pharmaceuticals in 2008. The Indian

pharmaceutical off shoring industry is slated to become a US$ 2.5 billion opportunity by 2012,

thanks to lower R&D costs and a high-talent pool in India.

Exports

India exported drugs worth US$ 4.15 billion in 2007-08. Between April to December 2008, India

exported pharmaceutical products worth US$ 3.77 billion.

A report by industry research firm, RNCOS forecasts that pharmaceutical exports will grow at a

CAGR of 18.5 per cent between 2007-08 and 2011-12. This growth will be fuelled by multi-billion

dollar patent expirations and growth in the global generics market.

Growth


India's pharmaceuticals market is expected to grow by about 12-13 per cent in 2009, says a study

by consulting firm IMS.

The domestic pharma retail market posted a healthy growth of 10 per cent in May over the

previous month. On a moving annual total basis (April 2008 to May 2009), the organized pharma

retail market grew by 10.4 per cent to US$ 7.40 billion, which was slightly higher than the

previous month's value of US$ 7.32 billion, according to consulting company, ORG-IMS.

A recent study by Yes Bank estimates the domestic formulations market to touch US$ 21.5 billion

by 2015. The Indian vaccine market was worth US$ 665 million in 2007-08 and is growing at over

20 per cent. Exports contribute over US$ 360 million, while the domestic market for vaccines is

US$ 300 million.

Rural Market

According to estimates rural areas account for 21 per cent of the country's pharmaceuticals

market. In 2006-07, the rural Indian pharmaceuticals market was estimated at around US$ 1.4

billion, having grown at about 40 per cent in 2006-07 against 21 per cent in the previous year.

Elder Pharmaceuticals has earmarked US$ 8.21 million investment for a rural thrust and set up a

dedicated division called 'Elvista' to spread its network to villages, towns, sub-urban/periphery

markets and hinterland districts.

Pharmaceutical Retail

India has 5.5 million chemists and druggists, and the organized retail market accounts for just 2

per cent of the industry but is posting a year-on-year growth of 30-40 per cent. The country's

pharmaceutical retail market is expected to cross the US$ 10 billion mark in 2010 and be worth

an estimated US$ 12 billion- US$ 13 billion by 2012.

Generics

According to a report by IMS Health, the Indian generic manufacturers will grow to more than

US$ 70 billion as drugs worth approximately US$ 20 billion in annual sales faced patent expiry in

2008. With nearly US$ 80 billion worth of patent-protected drugs to go off patent by 2012, Indian

generic manufacturers are positioning themselves to offer generic versions of these drugs.

Indian drug maker Dr Reddy's Laboratories has partnered with GlaxoSmithKline to develop and

market generics and formulations in emerging markets abroad.

Diagnostics Outsourcing/Clinical Trials


The Indian diagnostics and pathology laboratory business is presently around US$ 864 million and

is growing at a rate of 20 per cent annually.

Moreover, the US$ 200-million Indian clinical research outsourcing market will reach up to US$

600 million by 2010, according to a joint study done by KPMG and the Confederation of Indian

Industry (CII) in September 2008.

Research & Development

The search for innovative drug molecules and better technologies by pharmaceutical MNCs is

expected to offer a windfall for the smaller research-oriented Indian firms.

MNCs, whose drug pipelines are drying up and more blockbuster drugs going off-patent, are

looking for alliances for drug co-development, buying or licensing out innovative molecules which

can further be developed into finished drugs. Smaller Indian firms such as Indus Biotech and

Rubicon Research are set to sign multiple deals with MNCs for molecules as well as technology

out-licensing.

Moreover, in a bid to boost R&D in the pharmaceutical sector, the government will provide US$

422.96 million for establishing six National Institutes of Pharmaceutical Education and Research

over the next five years. Biotechnology major, Biocon, will be investing US$ 20.11 million in the

next fiscal in enhancing its R&D.

Government Initiative

The Government has taken various policy initiatives for the pharmaceutical sector

• Government has offered tax-breaks to the pharmaceutical sector. Units are eligible for

weighted tax deduction at 150 per cent for the R&D expenditure incurred.

• Steps have been taken to streamline procedures covering development of new drug

molecules, clinical research etc.

• Government has launched two new schemes—New Millennium Indian Technology

Leadership Initiative and the Drugs and Pharmaceuticals Research Programme—especially

targeted at drugs and pharmaceutical research.

In a bid to promote new drug research in the country, the government is mulling creating special

purpose vehicles (SPV) with insurance cover which will be used to fund new drug research. The

Department of Pharmaceuticals is also toying with the idea of creating drug research facilities and

centers that can be used by private companies for such research work on a pay-and-use basis.

Investment


• According to Ministry of Commerce, domestic investment in the pharmaceutical sector is

estimated at US$ 6.31 billion.

• The drugs and pharmaceuticals sector has attracted FDI worth US$ 1.43 billion from April

2000 to December 2008.

Road Ahead

The Indian pharmaceutical industry will see tremendous growth in the coming years as consumer

spending on healthcare is increasing in India. Consumer spending on healthcare is expected to

increase from 7 per cent of GDP in 2007 to 13 per cent of GDP by 2015.

____________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other sources

believed to be reliable but we do not represent that it is accurate or complete and it should

not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any

inadvertent error in the information contained in this report. This document is provide for

assistance only and is not intended to be and must not alone be taken as the basis for an

investment decision.


Firstcall India Equity Research: Email – [email protected]

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