Cipla Limited (Cipla) posted better-than-expected results for Q2’09. The sales surged 23.3% y-o-y to Rs13.5 billion on the strength of an upsurge in both domestic and export sales.
We believe the guidance of top-line growth of 12-15% for FY09 will be comprehensively surpassed, with steadily expanding domestic sales and robust export sales lending strength to our aggressive estimates.
Cipla is scaling up inhaler production at its plants to fully capitalize on its position as the second largest inhaler manufacturer in the world as the Montreal protocol deadline for ban on CFC inhalers approaches in 2010.The anti-asthma segment is expanding at 20% annually and generates 25% of revenues.
The ongoing launches of high-value non-CFC HFA inhalers and the probable launch of bio-similar products starting in FY11E are likely to lend considerable upside to our estimates. Consequently, Cipla is aggressively hiking its planned capacity in anticipation of a boost in the sales volume.
Outlook and valuation
We are revising the operating margin upwards to 21.9% for FY09E and to 20.9% in FY2010E.
We do not expect the anticipated pricing pressure in Q3’09 and Q4’09 to materialize as the company is gradually transitioning its product mix from the price erosion prone API and chemicals segments to the relatively insulated aerosol and injections segments.
The scheduled commissioning of the Indore plant in April 2010 is likely to squeeze the margin in FY10E. Thereafter, in FY11E, we foresee the margin to sustain at an average level of 21% as operational leverage is expected to kick in.
Though Cipla’s de-risked business model limits aggressive profit expansion, its comprehensive new product development program lends a considerable upside to the margins.
At the current market price of Rs179.85, the stock is trading at a forward P/E of 26x and 17.2x for FY09E and FY10E earnings, respectively. Based on DCF valuation, we have arrived at a target price of Rs207, assuming an 8% Rf, a 5% terminal growth rate, and a 12.3% WACC.
Our target price provides an upside of 15.2% from the current levels; thus, we upgrade the stock from Hold and recommend a BUY rating.