4QFY2013 Result Update | Pharmaceutical

May 30, 2013

Cipla
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Net profit 4QFY2013 1,906 119 1,162 349 268 3QFY2013 2,031 93 1,233 453 339 % chg qoq (6.1) 27.5 (5.8) (23.0) (21.0) 4QFY2012 1,814 90 1,042 347 292 % chg yoy 5.1 31.4 11.5 0.5 (8.3)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 30,751 904 0.6 435/301 174,040 2 20,215 6,124 CIPL.BO CIPLA@IN

`383 `444
12 months

Source: Company, Angel Research

For 4QFY2013, Ciplas numbers came in lower than expected on the bottomline as well as the sales front. The net sales and profits for the quarter came in at `1,906cr (`2,057cr expected) and `268cr (`384cr expected), registering a growth of 5.1% yoy and a dip of 8.3% yoy respectively. On the OPM front, the margins dipped by 83bp yoy for the quarter at 18.3% vs 19.1% expected. For FY2014, the management has given a revenue guidance of 12-14% yoy, with EBITDA margins estimated to be around 21%-22%. We recommend a buy rating on the stock. Results lower than expectations: For 4QFY2013, the company reported lower-than-expected numbers on the bottom-line front. The net sales and profits for the quarter came in at `1,906cr and `268cr, registering a growth of 5.1% yoy and a dip of 8.3% yoy respectively. The gross margin and operating margin came in at 60.9% and 18.3%. Consequently the net profit came in at `268cr, lower than the expectations mainly on the back of the lower-than-expected OPM and sales growth. Outlook and valuation: For FY2014, the Management has given a revenue growth guidance of 12-14% and guided EBITDA margins to be at 21-22%. We expect the companys net sales to post a 14.1% CAGR to `10,535cr and EPS to record a 7.4% CAGR to `22.2 over FY201315E. We recommend a Buy on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 36.8 15.7 28.0 19.5

Abs. (%) Sensex Cipla

3m 7.2 6.2

1yr 23.9 25.0

3yr 19.9 19.7

Key financials (Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2012 7,021 14.5 1,144 25.2 14.3 23.6 26.9 16.0 17.5 4.0 4.3 18.3

FY2013 8,087 15.2 1,545 35.0 19.2 24.8 19.9 18.5 18.3 3.4 3.9 15.6

FY2014E 9,192 13.7 1,573 1.8 19.6 22.1 19.5 16.2 15.4 3.0 3.3 15.0

FY2015E 10,535 14.6 1,781 13.2 22.2 22.1 17.3 15.9 15.7 2.6 2.8 12.7

Sarabjit Kour Nangra

+91 22 3935 7600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Cipla | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 ( Standalone) performance

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin Operating profit OPM (%) Interest Depreciation PBT Provision for taxation PAT before extra-ordinary item Extra-ordinary items/(income) PAT after extra-ordinary item EPS (`)
Source: Company, Angel Research

4QFY2013 1,906 118.9 2,025 1162 60.9 349 18.3 17.6 78 372 104 268 0 268 3.3

3QFY2013 2,031 93.3 2,124 1233 60.7 453 22.3 9.3 78 459 120 339 0 339 4.2

% chg qoq (6.1) 27.5 (4.7) (5.8) (23.0) 89.6 0.3 (19.0) (13.2) (21.0) (21.0)

4QFY2012 1,814 90.5 1,905 1042 57.4 347 19.1 2.3 70 365 73 292 0 292 3.6

% chg yoy 5.1 31.4 6.3 11.5 0.5 683.6 11.1 1.9 42.5 (8.3) (8.3)

FY2013 8,015 416.2 8,432 4952 61.8 1932 24.1 33.4 303 2012 505 1,507 0 1,507 18.8

FY2012 6,808 318.1 7,126 3940 57.9 1412 20.7 26.6 282 1421 298 1,124 0 1,124 14.0

% chg yoy 17.7 30.8 18.3 25.7 36.8 25.3 7.4 41.5 69.7 34.1 34.1

Exhibit 2: 4QFY2013 Actual vs. Angel estimates

(` cr) Net sales Other income Operating profit Tax Net profit
Source: Company, Angel Research

Actual 1,906 119 349 104 268

Estimates 2,057 90 520 146 384

Variance (7.3) 31.4 (32.9) (28.7) (30.4)

Top-line growth in line of expectations

For 4QFY2013, Cipla reported a lower than expected top-line. The net sales came in at `1,906cr vis--vis estimates of `2,057cr, registering a growth of 5.1% yoy. The domestic formulation segment grew only by 5.2% yoy to `793cr. The Management indicated that the weakness in domestic formulations was on account of the lower off-take of the products on account of the new pricing policy, which impacted the generic sales in the domestic markets. The branded formulation on the other hand grew by 11% yoy during the quarter. Exports dipped by 4.0% yoy during the period, mainly on back of the decline in the API exports, which were lower by 24% yoy during the period. API exports were impacted due to some large tenders in the African market having been delayed. However, it indicated that Cipla Medpro had recently won a sizable tender and growth could perk up going forward. Overall exports came in at `1,128cr, contributing 58.7% to overall sales. The API segment reported a 24.0% yoy dip to end the period at `175cr. Revenue of the formulation exports segment stood at `954cr during the quarter, registering a growth of 11.5% yoy.

May 30, 2013

Cipla | 4QFY2013 Result Update

Exhibit 3: Sales trend

1,400 1,213

1,200
1,000
(` cr)

1,084 970 979 754 962

1,106 957

1,128

800

793

600 400
200 0 4QFY2012 1QFY2013 2QFY2013 Domestic 3QFY2013 Export 4QFY2013

Source: Company, Angel Research

Operating profit margin dips

For 4QFY2013, the companys gross margin expanded by 353bp yoy to 60.9%. However, higher rise in the staff expenditure, which rose by 40.1% yoy during the quarter, led the OPM to end the quarter at 18.3% (19.1% in 4QFY2012) a dip of 83bp.

Exhibit 4: OPM trend

35.0
30.0

25.0
20.0 19.1 18.3

29.4
22.3 18.3

(%)

15.0

10.0
5.0

0.0 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

Source: Company, Angel Research

May 30, 2013

Cipla | 4QFY2013 Result Update

Net profit much below expectations

For 4QFY2013, the companys net profit came in at `268cr, posting a dip of 8.3% yoy growth lower than estimate of `384cr. Net profit growth came in lower than our estimates on the back of lower than expected sales growth and OPM.

Exhibit 5: Net profit trend

550 500 450 500

400
350

400
339 292 268

(` cr)

300
250

200
150 100 50 0 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

Source: Company, Angel Research

Concall takeaways

For FY2014, the company has guided for a revenue growth of 12-14% yoy on sales. EBDITA margin to be around 21-22% in FY2014. The company expects to close the Medpro acquisition in 2HFY2014; however, as over 90% of Medpros products are already being supplied by Cipla, the acquisition is unlikely to raise consolidated revenues significantly. The company filed 5 ANDAs in FY2013 and plans to increase the number of filing in FY2014. Tax rate guided at 24%-25% of PBT in FY2013-2014.

Recommendation rationale
Export segment to be the growth driver: Cipla exports to more than 180 countries, with growth coming through marketing alliances and distribution tie-ups in various markets. Exports contributed 59% to the total turnover of FY2012, with Africa, US and Latin America constituting more than 60% of total exports. In the US, Cipla has entered into a partnership with more than 22 players and has a strong product pipeline of ANDAs, of which 49 have been launched, while 30 are pending for approval. Another long term growth driver for the company is the launch of the CFC-free inhalers in the regulated markets. CFC-free inhalers in Europe and US address a potential market size of more than US$3bn. With the Medpro acquisition, the company now has a front end in the fast growing African market and now has a front-end in the market like other pharma
May 30, 2013

Cipla | 4QFY2013 Result Update

companies in the industry. The acquisition though will not add much, as majority of the products of the company were already supplied by the company. Overall we expect the companys exports to grow at a CAGR of 15.6% during FY2013-15. Increasing penetration in the domestic market: Cipla is one of the largest players in the domestic formulation market, with a market share of around 5%, contributing 41% to the total turnover in FY2013. The company is the market leader in key therapeutic areas such as respiratory care, anti-viral and urological. Ciplas distribution network in India consists of a field force of around 7,500 employees. The company plans to increase its focus on domestic markets with new therapies such as oncology and neuro-psychiatry in the offing. Cipla plans to focus on growing its market share and sales by increasing penetration in the Indian market, especially in rural areas and plans to expand its product portfolio by launching biosimilars, particularly relating to the oncology, anti-asthmatic and anti-arthritis categories. Overall we expect the companys domestic formulation business to post a CAGR of 14.0% during FY2013-15. Valuation: For FY2014, Ciplas Management has guided towards 12-14%+ sales growth and OPM of 21-22% for FY2014. We expect the companys net sales to post a 14.1% CAGR to `10,535cr and EPS to record a 7.4% CAGR to `22.2 over FY201315E. The stock is trading at 19.5x and 17.3x FY2014E and FY2015E earnings, respectively. We recommend a Buy on the stock.

Exhibit 6: Key assumptions

Key assumptions Domestic growth (%) Exports growth (%) Growth in employee expenses (%) Operating margins (excl tech. know-how fees) (%)
Source: Company, Angel Research

FY2014E 13.0 16.9 20.0 22.1

FY2015E 15.0 14.3 20.0 22.1

Exhibit 7: One-year forward PE band

600 500

400
(` )
300 200

100
-

Oct-06

Feb-10

May-07

Nov-07

Sep-11

Oct-12

Price
Source: Company, Angel Research

10x

15x

20x

25x

May 30, 2013

May-13

Jun-08

Dec-08

Apr-06

Aug-10

Mar-11

Apr-12

Jul-09

Cipla | 4QFY2013 Result Update

Exhibit 8: Recommendation Summary

Company Reco CMP (`) Alembic Pharma. Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Neutral Buy Buy Buy Buy Neutral Buy Accumulate Accumulate Neutral Neutral Neutral 134 177 775 383 2,105 75 2,300 63 599 768 382 2,610 1073 Aurobindo Pharma Buy Tgt. price (`) 264 962 444 2,535 206 78 676 877 Upside % 49.0 24.1 15.8 20.4 174.7 23.8 12.8 14.2 FY2015E PE (x) EV/Sales (x) EV/EBITDA (x) 9.7 9.2 16.1 17.3 16.6 3.4 27.6 8.1 13.3 18.4 17.0 26.3 27.0 1.3 1.1 2.0 2.8 2.4 0.8 5.3 0.8 1.9 2.4 1.1 2.6 6.0 6.6 7.0 11.1 12.7 12.1 3.9 18.7 5.4 9.0 11.3 8.8 15.8 14.6 FY12-15E CAGR in EPS (%) 26.1 58.2 14.8 1.4 10.8 47.9 4.8 15.8 30.6 29.1 (6.8) 13.4 15.8 FY2015E RoCE (%) 34.0 12.0 18.5 15.7 18.3 12.0 36.1 15.3 26.0 28.5 13.1 15.9 29.4 RoE (%) 34.7 18.0 24.7 15.9 21.8 13.7 31.0 14.7 25.3 24.8 19.1 16.7 22.0

Source: Company, Angel Research; Note: * December year ending

Background
Cipla is a leading pharmaceutical company in India with a strong presence in both, the export and domestic markets. On the export front, where it follows the partnership model, it has 5,700 product registrations in around 180 countries. Cipla is a market leader in the domestic formulation market with over 5% market share. Cipla is likely to continue on the growth trajectory owing to its entry into the inhalers market in the EU and potential new long-term manufacturing contracts with Global Innovators.

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Cipla | 4QFY2013 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 5,410 52.2 5,358 265 5,623 7.4 4,292 2,453 445 319 1,075 1,066 12.5 19.9 167 899 12.9 16.8 23 88 7.2 1,230 8.9 (95.0) 1,325 243.5 18.4 1,081 1,081 986 (1.8) 20.2 12.3 12.3 23.8 6,180 49.5 6,130 217 6,347 12.9 5,069 2,747 635 566 1,121 1,061 (0.4) 17.3 254 807 (10.2) 13.2 17 79 7.3 1,086 (11.7) 1,086 195.2 18.0 891 22 914 914 (7.4) 14.9 11.4 11.4 (7.4) 7,129 108.1 7,021 140 7,160 12.8 5,362 2,739 705 773 1,145 1,659 56.3 23.6 312 1,347 66.8 19.2 38 0.0 1,448 33.3 1,448 306.5 21.2 1,141 3 1,144 1,144 25.2 16.3 14.3 14.3 25.2 8,152 123.5 8,087 193 8,279 15.6 6,081 2,953 641 1,036 1,451 2,005 20.9 24.8 330 1,675 24.4 20.7 34 262 12.5 2,095 44.7 2,095 544.3 26.0 1,551 (6) 1,545 1,545 35.0 19.1 19.2 19.2 35.0 9,333 141.4 9,192 252 9,443 14.1 7,160 3,355 738 1,244 1,824 2,031 1.3 22.1 336 1,695 1.2 18.4 34 155 7.5 2,068 (1.3) 2,068 494.6 23.9 1,573 1,573 1,573 1.8 17.1 19.6 19.6 1.8 10,697 162.1 10,535 278 10,813 14.5 8,206 3,845 846 1,492 2,023 2,328 14.6 22.1 366 1,962 15.7 18.6 34 169 7.1 2,375 14.8 2,375 593.7 25.0 1,781 1,781 1,781 13.2 16.9 22.2 22.2 13.2

May 30, 2013

Cipla | 4QFY2013 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) Equity share capital Reserves & surplus Shareholders funds Minority interest Total loans Other long term liabilities Long Term Provisions Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net block Capital work-in-progress Goodwill Investments Long Term Loans and Advances Current assets Cash Loans & advances Others Current liabilities Net current assets Mis. Exp. not written off Total assets 4,367 62 1,226 3,079 1,214 3,153 6,095 246 590 402 4,221 96 1,162 2,963 1,175 3,045 7,422 1,269 361 4,130 90 568 3,471 1,417 2,713 7,935 2,897 886 2,011 684 4,246 1,147 3,100 285 4,632 1,411 3,221 371 5,352 1,742 3,610 367 10 2,532 358 4,780 143 573 4,063 1,311 3,469 5,852 2,078 3,774 367 10 2,532 404 6,118 879 643 4,596 1,471 4,648 6,352 2,444 3,908 367 10 2,532 464 7,733 1,728 737 5,267 1,686 6,047 179.2 6,095 0.9 213.1 7,422 31.5 233.2 7,935 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 161 5,750 5,911 5.1 161 6,506 6,667 541.0 161 7,478 7,641 29.2 161 8,858 9,019 966.9 30.0 50.4 280.5 161 161 10,244 11,837 10,408 12,001 966.9 30.0 50.4 280.5 966.9 30.0 50.4 280.5

10,347 11,736 13,329

10,347 11,736 13,329

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Cipla | 4QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2010 FY2011 FY2012 FY2013 1,325 167 (131) 256 1,105 (522) (166) (688) 669 (935) (155) 13 (408) 9 53 62 1,086 254 (260) 301 780 (950) (344) (1,294) 537 (225) 161 473 (42) 62 96 1,448 312 367 275 1,853 (472) (678) (1,150) (481) (187) (41) (709) (6) 96 90 2,095 330 (700) 518 1,208 (716) (1,264) (1,979) 987 (188) 25 824 53 90 143 FY2014E 2,068 336 (490) 523 1,391 (500) (500) (188) 33 (155) 736 143 879 FY2015E 2,375 366 (610) 604 1,527 (500) (500) (188) 10 (178) 849 879 1,728

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Cipla | 4QFY2013 Result Update

Key Ratio
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) (0.01) (0.1) 39.2 0.1 0.4 (0.0) (0.0) 0.1 0.4 0.0 0.0 (0.1) (0.3) 2.0 94 111 54 196 1.8 98 88 59 174 1.6 102 81 57 142 1.7 93 71 46 131 1.7 104 80 43 137 1.8 115 88 43 137 15.6 17.3 19.2 11.9 13.0 14.5 17.5 18.6 16.0 18.3 19.4 18.5 15.4 16.7 16.2 15.7 18.1 15.9 16.8 81.6 1.0 13.5 4.0 0.1 14.4 13.2 82.0 1.0 10.3 5.2 0.0 10.4 19.2 78.8 0.9 14.3 10.6 0.0 14.4 20.7 74.0 0.9 14.1 5.0 0.0 14.4 18.4 76.1 0.9 12.6 2.7 0.0 13.1 18.6 75.0 1.0 13.5 2.7 0.0 13.5 12.3 12.3 15.5 2.0 73.6 11.4 11.4 14.5 2.8 83.0 14.3 14.3 18.1 2.0 95.2 19.2 19.2 23.4 2.0 112.3 19.6 19.6 23.8 2.0 129.6 22.2 22.2 26.7 2.0 149.5 31.2 24.6 5.2 0.5 5.7 28.8 5.0 33.7 26.3 4.6 0.7 5.0 29.0 4.1 26.9 21.1 4.0 0.5 4.3 18.3 3.8 19.9 16.4 3.4 0.5 3.9 15.6 3.0 19.5 16.1 3.0 0.5 3.3 15.0 2.6 17.3 14.3 2.6 0.5 2.8 12.7 2.2 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

May 30, 2013

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Cipla | 4QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Cipla No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 30, 2013

11