Company Update: Cipla

Company Update: Cipla

We attended Cipla’s 73rd AGM. The company expects its topline to grow by 10-12% for FY2010E.

The company plans to raise Rs1,500 crore from the capital market, primarily to fund its incremental capex requirement of Rs500-600 crore over the next two years, an additional working capital requirement of Rs300 crore, and to repay short term debts.

In order to tap the biologics segment, the company is contemplating entering into a JV/alliance with a Chinese player.

After the losses on the forex front of Rs228cr in FY2009, the company is hedging all of its foreign denominated loans and covering 100% of its net exports on an m-o-m basis.

Given the supply-based model, we believe that in order to clock growth on the top-line the company would continue requiring additional capex (Cipla has already incurred a capex of Rs2,000cr in the last three years), which is likely to suppress the return ratios.

During the past month, the stock has under-performed the market and is down 8%. At Rs261, the stock is trading at 19.2xFY2010E and 17.5x FY2011E earnings. We recommend a REDUCE rating on the stock, with a target price of Rs238.