Kotak Securities puts REDUCE on Cipla

Kotak Securities puts REDUCE on Cipla

Cipla has reported strong growth in revenues to beat our expectation. Revenue for the quarter grew 23.3% to Rs13.55 billion as compared to Rs10.98 billion in Q2FY08.

Domestic formulation sales grew 16% to Rs5.9 billion which is much higher that the industry average. Export sales grew at about 32% to Rs7.23 billion, contributing 55% of total sales. Technology and licensing income was at Rs500 million against Rs360 million in Q2FY08

In H1FY09, revenues have grown by 28.1% to Rs25.62 billion while net profit decline 6.1% to Rs2.92 billion. Total forex losses in H1 stood Rs1.79 billion.

EBIDTA during the quarter grew sharply by 40.8% to Rs3.16 billion mainly due to improved exports realizations on account of favorable currency movement and change in product mix.

EBIDTA margin improved significantly by 290bps to 23.3% mainly due to lower material costs, higher capacity utilization and better product mix. The management however, believes these margins are not sustainable because pricing pressure across the world would decrease the margins in the coming quarters.

The company has provided for marked-to-market forex loss of Rs1.05 billion on account of revaluation of forward contracts, outstanding debtors and foreign currency loans due to rupee depreciation against the dollar.

Net profit declined by 20.6% to Rs1.51 billion during the quarter on account of provision for forex loss and higher depreciation. However, on a like-to-like basis (adjusted for forex loss), growth in net profit was 34% to Rs2.56 billion as compared to Rs1.91 billion in Q2FY08.

We have fine-tuned our earnings to incorporate the expected decline in margins and forex losses into our estimates. We expect EPS of Rs8.4 in FY09E and Rs12.1 in FY10E, respectively.

We revise our DCF-based target price to Rs216 (Rs.248 earlier). At our target price, the stock will be valued at 17.8x FY10 earning estimate. We maintain REDUCE rating.