2QFY2012 Result Update | Pharmaceutical

November 16, 2011

Cipla
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Net profit 2QFY2012 1,731 71 1,019 391 308 1QFY2012 1,550 66 882 328 253 % chg qoq 11.7 6.9 15.6 18.9 21.6 2QFY2011 1,580 52 831 331 263 % chg yoy 9.6 35.3 22.6 18.0 17.2

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 24,894 0.5 381/274 171,357 2 16,776 5,030 CIPL.BO CIPLA@IN

`310 `369
12 months

Source: Company, Angel Research

For 2QFY2012, Ciplas numbers came well above our expectations on the top-line and bottom-line fronts, mainly on the back of better-than-expected performance on the gross operating profit front. Improvement in the operating front came on the back of strong growth in the domestic formulation business. We maintain our Buy view on the stock. Results above expectations: For 2QFY2012, Cipla reported net sales of `1,731cr, posting 9.6% yoy growth and above our estimate of `1,649cr. Gross margin expanded by 628bp yoy to 58.9%. This was mainly on account of better product mix, which had lower proportion of anti-retroviral in formulation exports and domestic formulation sales. However, despite such gross margin expansion, OPM was flat at 22.6%, led by increased manpower cost and negative contribution of Indore SEZ, as it is in the optimization phase. Furthermore, net profit came in at `308cr, posting 17.2% yoy growth, higher than our estimate due to operating profit growth. Outlook and valuation: We expect the companys net sales to post a 15.5% CAGR to `8,164cr and EPS to record a 23.8% CAGR to `18.4 over FY201113E. The stock is trading at 20.8x and 16.8x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a revised target price of `369.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 36.8 25.2 17.1 20.9

Abs. (%) Sensex Cipla

3m 0.3 8.8

1yr (15.6) (8.5)

3yr 78.7 64.5

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

FY2010 5,358 8.0 1,081 40.2 13.5 19.9 23.0 19.2 15.6 4.2 4.6 23.3

FY2011 6,124 14.3 967 (10.5) 12.0 18.7 25.7 15.4 13.4 3.7 4.1 21.8

FY2012E 7,006 14.4 1,197 23.7 14.9 20.0 20.8 16.8 14.9 3.3 3.6 17.9

FY2013E 8,164 16.5 1,481 23.8 18.4 21.2 16.8 18.2 16.6 2.9 3.1 14.4

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Cipla | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 performance (Consolidated)

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 extraordinary item EPS (`)
Source: Company, Angel Research

2QFY2012 1,731 70.5 1,802 1019 58.9 391 22.6 2.4 66 393 85 308 308 3.8

1QFY2012 1,550 65.9 1,616 882 56.9 328 21.2 4.3 70 320 67 253 253 3.2

% chg (qoq) 11.7 6.9 11.5 15.6 18.9 (44.0) (6.6) 22.9 27.6 21.6 21.6

2QFY2011 1,580 52.1 1,632 831 52.6 331 21.0 0.3 64 319 56 263 263 3.3

% chg (yoy) 9.6 35.3 10.4 22.6 18.0 750.0 2.7 23.2 51.7 17.2 17.2

1HFY12 3,281 136.4 3,418 1902 57.9 719 21.9 6.6 136 713 152 562 562 7.0

1HFY11 3,130 118.1 3,248 1713 54.7 660 21.1 4.5 134 639 123 516 516 6.4

% chg 4.8 15.6 5.2 11.0 9.0 46.4 1.3 11.6 23.6 8.8 8.8

Exhibit 2: 2QFY2012 Actual vs. Angel estimates

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

Actual 1,731 71 391 85 308.2

Estimates 1,649 72 342 62 281.5

Variance (%) 5.0 (2.6) 14.1 37.5 9.5

Top-line growth mostly in-line with expectations

For 2QFY2012, Cipla reported net sales of `1,731cr, posting 9.6% yoy growth and above our estimate of `1,649cr. The domestic formulation segment grew by 12% yoy to `847cr. Overall exports increased by 9.4% yoy to `910.2cr, contributing 51.8% to overall sales. The API segment reported revenue of `159.4cr, down 5.3% yoy. Revenue of the formulation exports segment stood at `751.2cr during the quarter. Technological know-how fees stood at `7.8cr (`12.0cr), registering a dip of 35.0% yoy. However, overall other operating income reported growth of 63.5% yoy to `38.4cr (`23.5cr) in 2QFY2012.

November 16, 2011

Cipla | 2QFY2012 Result Update

Exhibit 3: Sales trend

1,200 1,000 800 760 569 766 675 975 832 756 782 734 830 744 652 911 847

(` cr)

600 400 200 0

4QFY2010

2QFY2011 Domestic

4QFY2011 Export

2QFY2012

Source: Company, Angel Research

Significant improvement in gross profit

For 2QFY2012, the companys gross margin expanded by 628bp yoy to 58.9%. This was mainly on account of better product mix, which had lower proportion of anti-retroviral in formulation exports and domestic formulation sales. However, despite such gross margin expansion, OPM stood flat at 22.6%, led by higher manpower cost and negative contribution of Indore SEZ, as it is in the optimization phase.

Exhibit 4: OPM trend

25.0 20.9 20.0 15.2 15.0 21.0 17.7 15.4 21.2 22.6

(%)
10.0 5.0 0.0 4QFY2010
Source: Company, Angel Research

2QFY2011

4QFY2011

2QFY2012

November 16, 2011

Cipla | 2QFY2012 Result Update

Net profit above expectations

For 2QFY2012, the companys net profit came in at `308cr, posting 17.2% yoy growth, higher than our estimate. Net profit growth was mainly on the back of higher operating profit during the quarter.

Exhibit 5: Net profit trend

360 320 280 240 263 257 263 233 214 253 308

(` cr)

200 160 120 80 40 0 4QFY2010 2QFY2011 4QFY2011 2QFY2012

Source: Company, Angel Research

Concall takeaways
For FY2012, management indicated 1012% top-line growth and operating margin of 1820%. Cipla has a field force of 7,000 employees in the domestic market. Management expects the companys operating margin to reach 24% in the next 23 years, with the Indore SEZ facility achieving optimum capacity utilization. During 2QFY2012, the Indore SEZ contributed `150cr in 2QFY2012 to the companys top line. Management expects capacity utilization at the Indore facility to reach optimum capacity levels in the next 23 years.

November 16, 2011

Cipla | 2QFY2012 Result Update

Recommendation rationale
Export segment to be the growth driver: Cipla exports to more than 175 countries, with growth coming through marketing alliances and distribution tie-ups in various markets. Exports contributed 52% to the total turnover of FY2011, with Africa, US and Latin America constituting more than 60% of total exports. In the US, Cipla has entered into a partnership with 22 players and has cumulative 64 approved ANDAs, of which 35 have been launched, while 46 are pending for approval. Further, Cipla has launched Salbutamol inhalers in the UK and has received approvals for Budesonide inhalers in Germany and Portugal and Beclomethasone in Portugal. Cipla has developed eight CFC-free inhalers for the EU region, of which six have been submitted for regulatory approvals. Launch of CFC-free inhalers in Europe and US with a potential market size of more than US$3bn would be the long-term growth driver for the company. Management has also indicated that it is negotiating with MNCs such as Pfizer, GSK and Boehringer for long-term supply agreements. 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 46% to the total turnover in FY2011. 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 7,000 employees. The company plans to increase its focus on domestic markets with new therapies such as oncology and neuro-psychiatry in the offering. 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. Return ratios to improve going ahead: Since FY2006, Cipla has incurred capex of `2,500cr (71% of GFA) for upgrading its existing manufacturing facilities at Kurkumbh, Patalganga, Bengaluru, Goa and Baddi, as well as setting up new facilities in Sikkim and Indore. While Cipla has already commenced the Sikkim plant, the Indore SEZ has also commenced operations. With significant capex been incurred and with most of the facilities commercialized, management expects Ciplas return ratio to improve as productivity level increases. Valuation: For FY2012, Cipla has guided for 1012% overall revenue growth. Indore SEZ is expected to contribute ~10% to the companys overall sales in FY2012. The company expects to maintain OPM of 1820% (excluding tech fees) for FY2012. We expect the companys net sales to post a 15.5% CAGR to `8,164cr and EPS to record a 23.8% CAGR to `18.4 over FY201113E. The stock is trading at 20.8x and 16.8x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a revised target price of `369.

November 16, 2011

Cipla | 2QFY2012 Result Update

Exhibit 6: Key assumptions

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

FY2012E 12.1 17.5 16.7 21.1 500

FY2013E 14.0 19.0 16.7 22.4 400

Exhibit 7: One-year forward PE band

500 400 300

(`)

200 100 -

Source: Company, Angel Research

Exhibit 8: Recommendation summary

Company Alembic Pharmaceuticals Aurobindo Pharma# Aventis* Cadila Healthcare Cipla Dr. Reddy's Dishman Pharma Glaxo* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Buy Sell Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy CMP Tgt. price Upside (`) 42 92 2,345 723 310 1,614 43 399 250 456 153 473 490 (`) 77 166 1,937 965 369 1,920 68 555 358 593 270 577 569 % PE (x) 82.5 80.5 (17.4) 26.8 19.0 19.0 59.3 39.0 34.0 30.1 76.5 22.2 16.1 5.5 6.7 26.1 15.8 16.8 16.8 3.8 22.8 7.2 9.7 15.4 4.1 9.0 19.0 FY2013E EV/Sales (x) 0.7 0.8 3.3 2.4 3.1 2.9 0.9 5.2 0.9 1.5 2.5 1.5 1.7 5.3 EV/EBITDA (x) 4.9 5.8 21.6 12.8 14.4 11.6 5.0 14.5 5.9 6.9 12.8 6.9 7.3 15.0 FY11-13E 30.6 9.9 15.4 19.4 23.8 22.7 3.5 14.6 15.6 14.8 24.0 29.6 22.0 21.4 FY2013E RoE (%) 37.0 15.1 17.1 31.1 18.2 25.2 8.8 30.7 16.9 24.9 30.8 23.4 25.9 22.4 26.6 10.2 15.7 25.2 16.6 17.7 7.1 41.0 14.2 23.3 23.9 11.7 26.8 22.4 CAGR in EPS (%) RoCE (%)

Neutral 1,982

Source: Company, Angel Research; Note: * December year ending;#CAGR in EPS is based on recurring EPS

November 16, 2011

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Price 10x 15x 20x 25x

Cipla | 2QFY2012 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) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 4,101 90.7 4,010 207 4,217 18.4 3,384 2,054 314 214 802 626 (8.9) 15.6 116 510 (12.7) 12.7 11 133 15.8 838 3.8 838 136.9 16.3 701 701 701 5.1 17.5 9.0 9.0 5.1 FY2009 5,022 61.0 4,961 276 5,236 24.2 4,013 2,347 439 271 955 948 51.4 19.1 152 796 56.1 16.1 33 90 7.9 1,129 34.7 233.3 895 124.5 13.9 771 771 1,004 43.3 15.5 9.9 9.9 9.9 FY2010 FY2011 FY2012E FY2013E 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 13.5 13.5 35.9 6,173 48.7 6,124 194 6,318 12.4 4,981 2,915 541 1,525 1,143 7.2 18.7 254 890 (1.0) 14.5 5 79 6.9 1,158 (5.8) 1,158 191.0 16.5 967 967 967 (1.9) 15.8 12.0 12.0 (10.7) 7,037 31.7 7,006 218 7,224 14.3 5,602 3,181 564 666 1,191 1,404 22.8 20.0 254 1,150 29.3 16.4 11 101 6.9 1,459 26.0 1,459 262.7 18.0 1,197 1,197 1,197 23.7 17.1 14.9 14.9 23.7 8,200 36.0 8,164 248 8,412 16.4 6,430 3,698 617 808 1,306 1,734 23.5 21.2 287 1,448 25.8 17.7 9 120 6.6 1,806 23.8 1,806 325.1 18.0 1,481 1,481 1,481 24 18.1 18.4 18.4 23.8

November 16, 2011

Cipla | 2QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net block Capital work-in-progress Investments Current assets Cash Loans & advances Others Current liabilities Net current assets Mis. Exp. not written off Total assets 2,202 540 1,661 233 93 3,745 80 1,138 2,527 1,288 2,457 4,445 2,693 701 1,992 366 80 4,418 53 1,113 3,251 1,405 3,013 5,452 2,897 886 2,011 684 246 4,367 62 1,226 3,079 1,214 3,153 6,095 3,595 1,099 2,496 584 246 5,351 286 1,268 3,797 1,451 3,900 7,227 4,245 1,353 2,892 434 246 6,219 131 1,583 4,505 1,621 4,598 8,171 4,795 1,640 3,155 284 246 7,450 192 2,008 5,250 1,907 5,542 9,228 155 3,600 3,755 540.5 149.2 4,445 155 4,192 4,348 940.2 164.2 5,452 161 5,750 5,911 5.1 179.2 6,095 161 6,494 6,655 354.7 217.6 7,227 161 7,411 7,571 354.7 245.2 8,171 161 8,544 8,706 254.7 267.8 9,228 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 16, 2011

Cipla | 2QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income 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 171 393 (563) 25 (538) 448 (155) (200) 93 (52) 132 80 65 292 (700) 13 (687) 395 (155) 130 369 (26) 80 53 256 1,086 (526) (166) (692) 669 (935) (155) 36 (386) 9 53 62 185 704 (598) (598) 311 (194) (2) 115 221 66 286 276 584 (500) (500) (239) (239) (155) 286 131 353 857 (400) (400) (100) (296) (396) 60 131 192 FY2008 838 131 (404) FY2009 FY2010 897 171 (711) 1,326 190 (174) FY2011 FY2012E FY2013E 1,158 254 (523) 1,459 254 (854) 1,806 287 (883)

November 16, 2011

Cipla | 2QFY2012 Result Update

Key ratios
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 0.1 0.7 0.2 0.9 (0.01) (0.1) 0.0 0.1 0.0 0.2 0.0 0.0 2.1 91 105 45 179 2.1 88 114 45 186 2.0 94 111 54 196 1.9 97 102 56 194 1.8 101 108 51 204 1.9 102 110 51 213 12.9 13.8 20.1 16.1 17.4 24.8 15.6 17.3 19.2 13.4 15.2 15.4 14.9 16.5 16.8 16.6 17.7 18.2 12.7 83.7 1.1 11.6 2.9 0.1 12.2 16.1 86.1 1.1 14.8 3.8 0.2 16.6 16.8 81.6 1.0 13.5 4.0 0.1 14.4 14.5 83.5 1.0 11.8 2.4 0.0 11.8 16.4 82.0 1.0 13.0 2.5 0.0 13.2 17.7 82.0 1.0 14.3 2.5 0.0 14.5 9.0 9.0 10.5 2.0 48.3 9.9 9.9 11.9 2.0 55.9 13.5 13.5 15.5 2.0 73.6 12.0 12.0 15.2 2.4 82.9 14.9 14.9 18.1 3.0 94.3 18.4 18.4 22.0 3.7 108.4 34.4 29.5 6.4 0.6 6.1 39.2 5.5 31.3 26.1 5.5 0.6 5.0 26.4 4.6 23.0 19.9 4.2 0.6 4.6 23.3 4.1 25.7 20.4 3.7 0.8 4.1 21.8 3.5 20.8 17.2 3.3 1.0 3.6 17.9 3.1 16.8 14.1 2.9 1.2 3.1 14.4 2.7 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 16, 2011

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Cipla | 2QFY2012 Result Update

Research Team Tel: 022 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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%)

November 16, 2011

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