Cipla’s revenues jumped 33.9% y-o-y to Rs12.1 billion for Q1’09 on the back of strong domestic and export sales. Domestic sales grew 15.9% to Rs5.9 billion, whereas export sales increased 49.7% to Rs6 billion. Exports sales grew strongly mainly due to a 117.4% growth in API and a 32.4% growth in formulations.
Operating profit surged 77.7% to Rs2.3 billion and margin improved 474 bps to 19.2%, compared to last year. The company reported a loss of Rs747.6 million on account of foreign exchange, which was partially offset by an improved effective tax rate due to tax incentives.
We have revised our net sales estimates upwards by around 1.5% for FY09E, considering the strong performance in Q1’09.
Cipla is expected to beat its guidance of 12-15% revenue growth for FY09 on the back of an expanding portfolio of partners in the US, robust domestic sales, strong growth in exports as both the formulations and API businesses have expanded, and the scaling up business from Sigma Pharmaceuticals Ltd.
Moreover, we have revised the net sales for FY10E upwards by 1% as we expect the Company to gain strength from a promising delivery pipeline with a launch of new drugs.
We believe that the change in the product mix will help the company to improve its margins. However, we expect the high inflation rate to limit the bottom line growth. Other than this, the capacity addition at the Indore plant will squeeze margins.
As a result, despite a positive surprise on the operating margins for Q1’09 and effective material cost management, we downgrade our margin estimate by around 60 bps to 19.6% for FY09E.
At the current market price, the stock is trading at a forward P/E of 23.1x and 20.3x for FY09E and FY10E earnings, respectively. It is trading above the industry multiple of 20.5x for FY09E and does not present any significant upside opportunity from the current levels. We reiterate our HOLD rating.