11th December, 2019 Q2FY20 RESULT UPDATE

Retail Equity Research

Cipla Limited Pharmaceuticals

BSE CODE: 500087 NSE CODE: CIPLA

Bloomberg CODE: CIPLA:IN SENSEX: 40,240

12M Investment period Rating as per Large Cap

CMP Rs 453 TARGET Rs 487 RETURN 8% (Closing: 10-12-19)

KEY CHANGES: TARGET RATING EARNINGS

HOLD

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Strong growth momentum in key segments

By segment, India (Rx + Gx) revenue grew 6.1% YoY, supported by strong recovery in generic business (~61% QoQ) and growth across both chronic and acute therapies under branded business (~13% YoY). North America business rose 25.7% YoY, where Cipla maintained its market share despite the price erosion of its key product Sensipar, due to higher competition. We expect that any further dip in price will be offset by recently launched generic Pregabalin and Daptomycin. SAGA business grew (~12% YoY in local currency), while private market grew more than 3x vs. market to drive ~13% YoY. Emerging market revenue though down 4.4% on YoY basis, surged 61.6% QoQ due to new product launches in key markets. Furthermore, in order to expand its footprint, CIPLA signed strategic partnership with Novartis in Sri-Lanka and Australia.

Margin sustained Gross margin rose to 66.8%, up 200bps YoY on account of lower expenses. EBITDA margin stood at 20.7%, an improvement of 320bps YoY, aided by topline growth. Separately, R&D expenses was at Rs. 295 cr (~7% of sales). Furthermore, PAT grew 25.0% YoY, while net profit margin expanded by 130bps YoY to 10.7% in Q2FY20.

Roadmap ahead The company plans to launch Berok 2.0 in India, Cipla’s flagship patient-focused initiatives in Respiratory. It also intends to launch Albuterol in the US in first half of FY21 and present IV Tramadol NDA filing later this year. The company has summited response for 12 observation across 10 units in Goa, to USFDA and is awaiting clearance. As of 30th September 2019, Cipla holds 172 approved ANDAs, while 22 have temporary approvals, another 63 are under approval, thus taking the total number to 257. Additionally, the company has repaid loan of USD 110mn in advance during 2QFY20 (a year ahead of schedule), thereby reducing its debt to equity ratio from 0.10 in Q4FY19 to 0.08 in 2QFY20.

Valuation Given strong growth across the segments, solid pipeline and new products, the company’s top line is bound to increase further. We reiterate our HOLD on the stock with a revised target price of Rs 487 using a target multiple of 19x P/E on FY21E adj. EPS.

Company Data Market Cap (cr) Rs.36,548 Enterprise Value (cr) Rs.40,311 Outstanding Shares (cr) 80.7 Free Float 63.0% Dividend Yield 0.7% 52 week high Rs.586 52 week low Rs.390 6m average volume 50,819 Beta 0.6 Face value Rs.2

Shareholding % Q4FY19 Q1FY20 Q2FY20

Promoters 36.7 36.7 36.7

FII’s 26.0 25.0 23.6

MFs/Insti 14.9 16.9 18.2

Public 16.1 16.2 16.2

Others 6.4 5.3 5.3

Total 100.0 100.0 100.0

Promoters pledge 0.0 0.0 0.0

Price Performance 3 Month 6 Month 1 Year

Absolute Return -4.6% -17.7% -11.2% Absolute Sensex 9.0% 1.8% 15.8% Relative Return* -13.6% -19.5% -27.0%

*over or under performance to benchmark index

Consolidated (cr) FY19A FY20E FY21E Sales 16,362 17,691 19,130 Growth (%) 7.5 8.1 8.1 EBITDA 3,097 3,526 3,755 EBITDA Margin (%) 18.9 19.9 19.6 Adj. PAT 1,528 1,761 2,064 Growth (%) 8.3 15.3 17.2 Adj. EPS 18.9 21.8 25.6 Growth (%) 8.2 15.3 17.2 P/E 27.7 20.8 17.7 P/B 2.8 2.2 2.0 EV/EBITDA 15.1 11.4 10.6 ROE (%) 10.2 10.7 11.2 D/E 0.3 0.3 0.2

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CIPLA Sensex Rebased

Strong quarter Cipla is a leading global pharmaceutical company with 1,500 plus products across various therapeutic categories. It has presence in over 80 countries.

Cipla Limited posted Q2FY20 revenue of Rs. 4,396 cr (+9.6% YoY), largely driven by recovery in Indian trade generic business distribution and solid growth in US business.

EBITDA stood at Rs. 910 cr. (+29.5% YoY), while margin expanded to 20.7% (+320bps YoY) due to growth across key segments.

Net profit grew 25.0% YoY to Rs. 471cr. supported by top-line growth. Besides, management indicated that tax rate is likely to be in the range of ~29-30% in FY20, and at least 200 basis point improvement in FY21.

Management highlighted that gross margin is likely to be in the range of 65-66% in FY20.

Given strong pipeline with key products launches across segments, we believe growth momentum to continue in second half. We estimate PAT to grow at 16.2% FY19-21E CAGR and EBITDA margin to improve to ~20% by FY21E.

We reiterate our HOLD rating on the stock with a revised target price of Rs. 487 based on 19x FY21E adj. EPS.

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Quarterly Financials (Consolidated)

Profit & Loss Account

Q2FY20 Q2FY19 YoY Growth % Q1FY20 QoQ Growth % H1FY20 H1FY19 YoY Growth %

Revenue 4,396 4,012 9.6 3,989 10.2 8,385 7,951 5.5

EBITDA 910 702 29.5 905 0.5 1,814 1,429 27.0

EBITDA margins 20.7 17.5 320bps 22.7 (200bps) 21.6 18.0 360bps

Depreciation 283 282 0.4 268 5.6 551 523 5.4

EBIT 627 420 49.1 637 (1.6) 1,263 906 39.5

Interest 46 44 3.8 52 (11.6) 98 79 23.6

Other Income 101 133 (24.2) 78 28.3 179 303 (40.9)

Exceptional Items - - - - - - - -

PBT 681 509 33.9 663 2.7 1,344 1,129 19.0

Tax 201 142 40.8 192 4.3 393 316 24.3

Share of profit from Associate 6 1 - 24 - 29 0 -

Minority Interest 3 (10) (131.1) (31) (110.1) (28) (16) 76.7

Reported PAT 471 377 25.0 478 (1.4) 950 828 14.6

Adjustments - - - - - - - -.

Adjusted PAT 471 377 25.0 478 (1.4) 950 828 14.6

No. of shares 80.7 80.7 - 80.7 - 80.7 80.7 -

EPS (Rs) 5.8 4.7 25.0 5.9 (1.4) 11.8 10.3 14.6

Segment Revenue

Q2FY20 Q2FY19 YoY Growth

% Q1FY20

QoQ Growth %

H1FY20 H1FY19 YoY

Growth %

India (Rx+Gx) 1,745 1,644 6.1 1,355 28.8 3,100 3,188 (2.8)

US 953 758 25.7 1,119 (14.8) 2072 1428 45.1

SAGA 740 754 (1.9) 691 7.1 1431 1585 (9.7)

Emerging Markets 451 472 (4.4) 279 61.6 730 941 (22.4)

Europe 190 141 34.8 201 (5.5) 391 275 42.2

APIs 157 172 (8.7) 182 (13.7) 339 372 (8.9)

Others 159 71 123.9 160 (0.6) 319 162 96.9

Total sales 4,396 4,012 9.6 3,989 10.2 8,385 7,951 5.4

Change in Estimates

Old estimates New estimates Change %

Year / Rs. cr FY20E FY21E FY20E FY21E FY20E FY21E

Revenue 17,931 20,423 17,691 19,130 (1.3) (6.3)

EBITDA 3,444 4,095 3,526 3,755 2.4 (8.3)

Margins (%) 19.2 20.1 19.9 19.6 70bps (50bps)

Adj. PAT 1,778 2,209 1,761 2,064 (0.9) (6.6)

EPS 22.1 27.4 21.8 25.6 (1.3) (6.6)

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PROFIT & LOSS

Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E

Revenue 14,630 15,219 16,362 17,691 19,130

% change 7.0 4.0 7.5 8.1 8.1

EBITDA 2,476 2,826 3,097 3,526 3,755

% change (1.0) 14.2 9.6 13.8 6.5

Depreciation 1,323 1,323 1,326 1,202 1,100

EBIT 1,153 1,504 1,771 2,324 2,655

Interest 159 114 168 143 139

Other Income 229 280 477 268 200

PBT 1,222 1,669 2,079 2,449 2,716

% change (39.1) 36.6 24.5 17.8 10.9

Tax 180 250 570 710 679

Tax Rate (%) 14.7 15.0 27.4 29.0 25.0

Reported PAT 1,006 1,411 1,528 1,761 2,064

Adj* - - - - -

Adj PAT 1,006 1,411 1,528 1,761 2,064

% change (33.2) 40.2 8.3 15.3 17.2

No. of shares (cr) 80.5 80.6 80.7 80.7 80.7

Adj EPS (Rs) 12.5 17.5 18.9 21.8 25.6

% change (33.2) 40.0 8.2 15.3 17.2

DPS (Rs) 2.0 3.0 3.0 3.0 3.0

CEPS (Rs) 28.9 33.9 35.4 36.7 39.2

CASH FLOW

Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E

Net inc. + Depn. 2,329 2,733 2,854 2,963 3,165

Non-cash adj. (178) (487) (99) (86) (158)

Changes in W.C 231 (783) (1,064) (666) (749)

C.F. Operation 2,382 1,463 1,691 2,210 2,259

Capital exp. (1,098) (739) (504) (611) (657)

Change in inv. (234) (154) (1,243) (519) (520)

Other invest.CF 19 39 78 (83) (111)

C.F – Investment (1,313) (854) (1,669) (1,212) (1,288)

Issue of equity 12 0 0 - -

Issue/repay debt (1,080) (34) (60) (200) (200)

Dividends paid (194) (161) (242) (242) (242)

Other finance.CF (61) (190) (47) (143) (139)

C.F – Finance (1,324) (385) (349) (585) (581)

Chg. in cash (254) 223 (326) 413 390

Closing cash 624 966 619 1,032 1,422

BALANCE SHEET

Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E

Cash 624 966 619 1,032 1,422

Accounts Receivable 2,890 3,102 4,151 4,665 5,235

Inventories 3,485 4,045 3,965 4,256 4,594

Other Cur. Assets 1,824 2,701 3,692 4,523 5,382

Investments 137 158 490 511 533

Gross Fixed Assets 6,033 6,943 5,788 6,354 6,967

Net Fixed Assets 5,009 5,315 5,114 4,479 3,991

CWIP 719 512 331 331 331

Intangible Assets 5,427 5,103 4,777 4,822 4,866

Def. Tax (Net) 168 188 201 258 247

Other Assets 687 771 622 623 623

Total Assets 20,970 22,861 23,963 25,499 27,224

Current Liabilities 2,858 3,396 3,285 3,436 3,608

Provisions 141 138 121 123 124

Debt Funds 4,158 4,148 4,704 4,504 4,304

Other Liabilities 851 597 509 614 590

Equity Capital 161 161 161 161 161

Reserves & Surplus 12,365 14,068 14,851 16,371 18,193

Shareholder’s Fund 12,525 14,229 15,012 16,532 18,354

Minority Interest 438 352 332 291 244

Total Liabilities 20,970 22,861 23,963 25,499 27,224

BVPS (Rs) 156 177 186 205 227

RATIOS

Y.E March FY17A FY18A FY19A FY20E FY21E

Profitab. & Return

EBITDA margin (%) 16.9 18.6 18.9 19.9 19.6

EBIT margin (%) 7.9 9.9 10.8 13.1 13.9

Net profit mgn.(%) 6.9 9.3 9.3 10.0 10.8

ROE (%) 8.0 9.9 10.2 10.7 11.2

ROCE (%) 6.7 8.0 8.8 10.9 11.6

W.C & Liquidity

Receivables (days) 72.1 74.4 92.6 96.2 99.9

Inventory (days) 239.3 271.5 250.2 248.4 246.5

Payables (days) 107.9 142.2 122.9 121.1 119.3

Current ratio (x) 2.7 2.8 3.3 3.7 4.1

Quick ratio (x) 1.3 1.3 1.8 2.1 2.4

Turnover & Leverage

Gross asset T.O (x) 2.6 2.3 2.6 2.9 2.9

Total asset T.O (x) 0.7 0.7 0.7 0.7 0.7

Int. covge. ratio (x) 7.2 13.2 10.5 16.3 19.1

Adj. debt/equity (x) 0.3 0.3 0.3 0.3 0.2

Valuation

EV/Sales (x) 3.5 3.1 2.9 2.3 2.1

EV/EBITDA (x) 20.6 16.6 15.1 11.4 10.6

P/E (x) 46.8 30.8 27.7 20.8 17.7

P/BV (x) 3.8 3.1 2.8 2.2 2.0

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Recommendation Summary

Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap;

Buy - Upside is above 10%. Hold - Upside is between 0%- 10%.

Reduce - Downside is more than 0%. Neutral - Not Applicable

Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%.

Hold - Upside is between 0% - 10%. 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.

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Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

Dates Rating Target

18-Jan-17 HOLD 563

28-Nov-17 BUY 684

21-Feb-18 HOLD 653

28-Aug-18 HOLD 665

18-Mar-19 HOLD 549

11-Dec-19 HOLD 487

General Disclosures and Disclaimers

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I, Dilish K Daniel, CFA®, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all

of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit.

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