Cipla beat our expectations for Q3’09 as the topline swelled 21.5% y-o-y to Rs13.4 billion, buoyed by a consistent domestic performance and a sharp upsurge in formulations exports.
The EBITDA margin surged 148 bps (y-o-y) to 25.2% in Q3’09 on the strengths of an improved product mix and a depreciating rupee.
Around 45% of Cipla’s revenue flows in from the domestic market, is projected to expand at 14–15% per annum over the next two years. We expect the company to maintain its market share without compromising on margins.
Its exports are increasingly getting skewed towards higher-value higher-margin formulations over bulk drugs.
The anti-asthma segment, which constitutes 25% of its revenues, is likely to get a boost as consumers shift from CFC inhalers to non-CFC inhalers in accordance with the Montreal Protocol’s deadline for banning the use of CFC inhalers by 2010.
Low leverage levels and absence of FCCBs, unlike peers such as Ranbaxy and Glenmark, lend strength to Cipla’s balance sheet.
Cipla is a strong value proposition as its domestic sales and API exports are on a steady growth trajectory while its formulations exports shore up better-than-expected growth.
We maintain a BUY rating on the stock with a target price of Rs223. Our DCF-based valuation assumes a 12.72% WACC and a 5% terminal growth rate.
The fair value gives a 16.1% upside at the current market price (CMP) of Rs192, and the stock trades at a forward P/E of 20.2x and 15.1x for FY09E and FY10E earnings, respectively.