1QFY2018 Result Update | Pharmaceutical

August 18, 2017

Cipla

SELL

CMP

`590

Performance Highlights

Target Price

`458

Y/E March (` cr)

1QFY2018

4QFY2017

% chg qoq

1QFY2017

% chg yoy

Investment Period

Net sales

3,432

3,487

(1.6)

3,556

(3.5)

Other income

Stock Info

244

118

107.3

119

105.0

Gross profit

Sector

Pharmaceutical

2,256

2,172

3.9

2,186

3.2

Operating profit

Market Cap (` cr)

47,493

554

411

34.7

517

7.1

Adj. Net profit

Net Debt (` cr)

3,488

409

212

93.1

339

20.6

Source: Company, Angel Research

Beta

0.7

52 Week High / Low

622/479

Cipla posted poor set of numbers for 1QFY2018. Sales came in at `3,432cr

Avg. Daily Volume

69,441

(`3,789cr expected) v/s. `3,566cr in 1QFY2017, a yoy de-growth of 3.5%, mainly

Face Value (`)

driven by the dip in Indian formulation sales. Indian formulation sales registered

BSE Sensex

31,771

(`1,271cr) a yoy dip of 12.9%, mainly on the back of GST implementation. On

Nifty

9,897

operating front, the EBITDA margins came in at 16.1% (15.5% expected) v/s. 14.8%

Reuters Code

CIPL.BO

in 1QFY2017. Thus, the PAT came in at ` 409cr (`346cr expected) v/s. `339cr in

Bloomberg Code

CIPLA@IN

1QFY2017, a yoy growth of 20.6%. We maintain our SELL.

Results lower than our expectations, driven mainly by other income: Sales came in at

`3,432cr (`3,789cr expected) v/s. `3,566cr in 1QFY2017, a yoy de-growth of 3.5%.

Shareholding Pattern (%)

Indian formulation sales posted (`1,271cr) a yoy dip of 12.9%, mainly on the back of

Promoters

36.7

GST implementation. Its other market USA (US$100mn), posted 2.0% yoy growth.

MF / Banks / Indian Fls

17.9

South Africa (ZAR 998mn), posted a 10.0% yoy growth. On operating front, the

FII / NRIs / OCBs

26.9

EBITDA margins came in at 16.1% (15.5% expected) v/s. 14.8% in 1QFY2017,

Indian Public / Others

18.5

mainly on the back of lower than expected sales during the quarter and 11.2% rise in

the other expenses. Thus, the PAT came in at ` 409cr (`346cr expected) v/s. `339cr

Abs. (%)

3m 1yr

3yr

in 1QFY2017, a yoy growth of 20.6%.

Sensex

8.0

13.2

20.4

Outlook and valuation: We expect the company to post a

16.7% CAGR in

Cipla

2.4

6.6

25.6

net sales to

`19,437cr and EPS to record a

38.7% CAGR to

`24.1 over

FY2017-19E. We re-iterate our SELL stance on the stock.

3-Year Daily Price Chart

Key financials (Consolidated)

750

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

600

Net sales

13,494

14,281

16,619

19,437

450

% chg

15.5

5.8

16.4

17.0

300

Adj. Net profit

1,360

1,006

1,568

1,936

150

% chg

(13.8)

(26.0)

55.8

23.5

EPS (`)

16.9

12.5

19.5

24.1

EBITDA margin (%)

16.2

14.9

15.4

16.2

P/E (x)

34.9

47.1

30.2

24.5

Source: Company, Angel Research

RoE (%)

12.2

8.4

11.9

13.1

RoCE (%)

9.1

4.4

9.2

10.9

P/BV (x)

4.1

3.8

3.4

3.0

EV/Sales (x)

3.8

3.5

3.0

2.5

Sarabjit Kour Nangra

EV/EBITDA (x)

+91 22 3935 7600 Ext: 6806

23.5

23.7

19.6

15.7

Source: Company, Angel Research; Note: CMP as of August 16, 2017

[email protected]

Please refer to important disclosures at the end of this report

Cipla | 1QFY2018 Result Update

Exhibit 1: 1QFY2018 ( Consolidated) performance

1QFY2018

4QFY2017

% chg qoq

1QFY2017

% chg yoy

FY2017

FY2016

% chg yoy

Y/E March (` cr)

Net sales

3,432

3,487

(1.6)

3,556

(3.5)

14,281

13,494

5.8

Other income

244.1

117.8

107.3

119.1

105.0

578.1

504.1

14.7

Total income

3,676

3,605

2.0

3,675

0.0

14,859

13,998

6.1

Gross profit

2256

2172

3.9

2186

3.2

8964

8404

6.7

Gross margin

65.7

62.3

61.5

62.8

62.3

Operating profit

554

411

34.7

517

7.1

2126

2184

(2.6)

OPM (%)

16.1

11.8

14.5

14.9

16.2

Interest

27.9

33.4

31.5

(11.5)

159

207

(22.9)

Depreciation

213

632

(66.2)

204

4.7

1323

754

75.4

PBT

557

(137)

401

1222

1727

(29.2)

Provision for taxation

131

(76)

180

332

(45.8)

PAT before extra-ordinary item

426

(61)

346

23.2

1042

1395

(25.3)

Share of Profit /( loss ) of asso.

Extra-ordinary items/(income)

PAT after extra-ordinary item

409

(62)

339

20.6

1006

1360

(26.0)

Adj. PAT

409

212

93.1

339

20.6

1006

1360

(26.0)

EPS (`)

5.1

2.6

4.2

12.5

16.9

Source: Company, Angel Research

Exhibit 2: 1QFY2018 - Actual vs. Angel estimates

(` cr)

Actual

Estimates

Variance

Net sales

3,432

3,789

(9.4)

Other income

244

119

104.9

Operating profit

554

588

(5.9)

Tax

131

97.7

Net profit

409

346

18.1

Source: Company, Angel Research

Top-line growth lower than expectation

Sales came in at `3,432cr (`3,789cr expected) v/s. `3,500cr in 1QFY2017, a yoy

de-growth of 1.9%, mainly driven by the dip in Indian formulation sales. Indian

formulation sales registered (`1,271cr) a yoy dip of 12.9%, mainly on the back of

GST implementation. The company expects domestic business to grow at low-to-

mid-teens in coming quarters. Exports (`2255cr) posted a yoy growth of 9.9%.

USA (US$100mn) posted a yoy growth of 2% in $ terms. Cipla is now one of the

fastest growing generics players in the US, strong DTM performance i.e. 9 of the

48 (19%) in IMS are in the leadership (no 1) position, while 28 of 48 (58%)

products ranked among Top 3 in their segments. 3 ANDAs have been filed, during

the quarter, with 25 expected to be filed in FY2018. In terms of the launches, the

company launched 4 new products, addressing a total market size of US$ 390mn;

10+ launches planned for the remaining 9 months. As on July 30, 2017, the

company had 238 ANDA’s with 142 ANDA’s approved.

South Africa (SA) (ZAR998mn) registered a growth of ~10% over the last year.

Strong growth in private market; As per IMS MAT (Jun’2017), Cipla grew at

August 18, 2017

Cipla | 1QFY2018 Result Update

10.3% in the private market v/s. 9.2% market growth. Cipla maintained its

overall ranking in SA as the 4th largest pharmaceutical company; including

the tender business, Cipla is the 3rd largest pharmaceuticals company in SA.

Emerging market sales (US$113mn) posted a flat growth.

Exhibit 3: Sales Trend

3,500

3,000

2,500

2240

2254

2191

2150

2239

2,000

1459

1522

1408

1,500

1247

1271

1,000

500

1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018

Domestic

Export

Source: Company

Operating profit margin better than expectation

On operating front, the EBITDA margins came in at 16.1% (15.5% expected) v/s.

14.8% in 1QFY2017, mainly on the back of lower than expected sales during the

quarter and an 11.2% rise in the other expenses. Gross margins came in at 65.7%

v/s. 60.8% in 1QFY2017. Total R&D investments for this quarter were at 6.0% of

revenues.

Exhibit 4: OPM Trend

20.0

16.4

16.1

14.5

15.0

11.8

14.8

10.0

11.8

5.0

0.0

4QFY2016 1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018

Source: Company

August 18, 2017

Cipla | 1QFY2018 Result Update

Net profit better than expectation; aided by other income

Thus, the PAT came in at ` 409cr (`346cr expected) v/s. `339cr in 1QFY2017, a

yoy growth of 20.6%. This was also aided by the other income during the quarter,

which came in at `244.1cr v/s. `119.1cr during the last corresponding period.

Exhibit 5: Net Profit Trend

600

500

409

354

400

339

300

212

200

100

1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018

Source: Company

Concall takeaways

 R&D is expected to remain at 8% in FY2018E, and not more than 9% in

coming years.

 Pricing pressure in US stood at high-single-digit to low-double-digit.

 Capex expected to be around `700-800cr in FY2018.

 In USA, the company expects to file 20-25 ANDAs in FY2018.

 EBITDA margin guidance maintained at mid-to-high teens for FY2018.

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 60% to the total turnover in FY2017, with Africa, US

and Latin America constituting more than ~60% of total exports. In the US, Cipla

has a strong product pipeline of 238 ANDAs, out of which, 142 are approved.

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. Overall, we expect the company’s

exports to grow at a CAGR of 18.7% during FY2017-19E.

Increasing penetration in the domestic market: Cipla is one of the largest players

in the domestic formulation market with a market share of around 5.3%. Domestic

formulations contributed 40% to the company’s total turnover in FY2017. The

company is the market leader in key therapeutic areas such as respiratory care,

August 18, 2017

Cipla | 1QFY2018 Result Update

anti-viral and urological. Cipla’s distribution network in India consists of a field

force of around 7,000-8,000 employees. The company plans to increase its focus

on domestic markets with new therapies such as oncology and neuro-psychiatry in

the offing. The company 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 related to

the oncology, anti-asthmatic and anti-arthritis categories. Overall, we expect

the company’s domestic formulation business to post a CAGR of 13.5% over

FY2017-19E.

Valuation: We expect the company to post a 16.7% CAGR in net sales to

`19,437cr and EPS to record a 38.7% CAGR to `24.1 over FY2017-19E. The

growth in the top-line would be driven by domestic formulation sales and exports.

We maintain our SELL stance on the stock.

Exhibit 6: Key assumptions

Key assumptions

FY2018E

FY2019E

Domestic growth (%)

13.0

15.0

Exports growth (%)

18.6

18.8

Growth in employee expenses (%)

15.0

Operating margins (excl tech. know-how fees) (%)

15.4

16.2

Source: Company, Angel Research

Exhibit 7: One-year forward PE band

800

700

600

500

400

300

200

100

Price

10x

15x

20x

25x

Source: Company, Angel Research

August 18, 2017

Cipla | 1QFY2018 Result Update

Exhibit 8: Recommendation Summary

Company

Reco

CMP

Tgt. price

Upside

FY2019E

FY17-19E

FY2019E

(`)

% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Buy

515

600

16.5

18.9

2.1

11.0

12.8

24.3

20.6

Aurobindo Pharma

Buy

714

823

15.3

13.9

2.1

9.7

14.2

25.3

22.7

Cadila Healthcare

Reduce

484

426

(11.9)

22.7

3.7

18.0

21.0

17.3

22.9

Cipla

Sell

590

458

(22.4)

24.5

2.5

15.7

38.7

10.9

13.1

Dr Reddy's

Accumulate

1,999

2,219

11.0

18.0

2.0

11.2

23.6

11.2

13.0

Dishman Pharma

Under Review

293

18.9

1.3

10.1

(7.2)

2.9

2.5

GSK Pharma

Neutral

2,365

40.4

5.4

30.3

30.6

28.9

26.5

Indoco Remedies

Sell

193

153

(20.9)

15.2

1.5

10.1

23.0

11.3

15.6

Ipca labs

Buy

420

620

47.6

16.7

1.3

8.5

27.9

12.8

11.2

Lupin

Buy

962

1,467

52.5

14.4

2.0

8.4

8.2

20.5

17.5

Sanofi India*

Reduce

4,127

3,845

(6.8)

26.8

2.8

16.5

9.2

23.9

25.8

Sun Pharma

Buy

485

558

15.0

19.6

3.2

14.4

8.0

12.3

15.2

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

Company Background

Cipla is a leading pharmaceutical company in India with a strong presence in

both, the export and domestic markets. On the exports 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 ~5.3% market

share. The company 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.

August 18, 2017

Cipla | 1QFY2018 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

Gross sales

9,902

11,861

13,709

14,497

16,871

19,732

Less: Excise duty

149.3

179.7

215.0

216.4

251.8

294.5

Net sales

9,753

11,681

13,494

14,281

16,619

19,437

Other operating income

348

296

349

Total operating income

10,100

12,029

13,790

14,630

16,968

19,786

% chg

22.0

19.1

14.6

6.1

16.0

16.6

Total expenditure

7,967

9,612

11,310

12,154

14,062

16,292

Net raw materials

3,875

4,556

5,090

5,317

6,199

7,250

Other mfg costs

827

993

1,142

1,313

1,510

1,736

Personnel

1,543

2,083

2,434

2,634

3,029

3,483

Other

1,722

1,981

2,645

2,891

3,324

3,823

EBITDA

1,786

2,069

2,184

2,126

2,557

3,145

% chg

(11.0)

15.9

5.5

(2.6)

20.3

23.0

(% of Net Sales)

18.3

17.7

16.2

14.9

15.4

16.2

Depreciation & amort.

373

457

754

1,323

848

944

EBIT

1,413

1,613

1,430

803

1,709

2,201

% chg

(15.6)

14.1

(11.4)

(43.8)

112.7

28.8

(% of Net Sales)

14.5

13.8

10.6

5.6

10.3

11.3

Interest & other charges

146

207

159

Other Income

266

209

229

(% of PBT)

14.1

12.4

12.1

18.7

10.7

8.7

Recurring PBT

1,881

2,141

1,728

1,222

2,128

2,619

% chg

(9.1)

13.8

(19.3)

(29.3)

74.1

23.1

Extraordinary exp./(Inc.)

PBT (reported)

1,881

2,141

1,728

1,222

2,128

2,619

Tax

463.4

535.3

331.6

179.8

532.0

654.9

(% of PBT)

24.6

25.0

19.2

14.7

25.0

PAT (reported)

1,417

1,606

1,396

1,042

1,596

1,965

Add: Share of earnings of asso.

(12)

(7)

(10)

(9)

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

1,388

1,578

1,360

1,006

1,568

1,936

ADJ. PAT

1,388

1,578

1,360

1,006

1,568

1,936

% chg

(8.9)

13.6

(13.8)

(26.0)

55.8

23.5

(% of Net Sales)

14.2

13.5

10.1

7.0

9.4

10.0

Basic EPS (`)

17.3

19.6

16.9

12.5

19.5

24.1

Fully Diluted EPS (`)

17.3

19.6

16.9

12.5

19.5

24.1

% chg

(8.9)

13.6

(13.8)

(26.0)

55.8

23.5

August 18, 2017

Cipla | 1QFY2018 Result Update

Balance sheet (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

SOURCES OF FUNDS

Equity share capital

161

Preference Capital

Reserves & surplus

9,890

10,629

11,356

12,365

13,744

15,493

Shareholders funds

10,050

10,801

11,516

12,525

13,905

15,653

Minority interest

180

350

438

Total loans

1,247.9

1,701.8

5,191.4

4,112.6

Other long term liabilities

32.6

Long Term Provisions

77.4

168.4

255.6

263.5

Deferred tax liability

309.0

284.6

897.0

588.8

Total liabilities

11,767

13,169

18,243

17,961

19,341

21,089

APPLICATION OF FUNDS

Gross block

6,183

6,868

8,293

9,999

11,199

12,399

Less: acc. depreciation

2,180

2,634

3,388

4,711

5,559

6,503

Net block

4,003

4,234

4,905

5,288

5,640

5,896

Capital work-in-progress

442

Goodwill

2,493

2,735

6,084

5,427

Investments

709

640

757

973

Long Term Loans and Adv.

301

419

603

773

899

1,052

Current assets

5,340

7,201

8,259

7,900

9,284

11,187

Cash

175

564

871

624

808

1,274

Loans & advances

596

701

958

857

997

1,166

Others

4,569

5,936

6,429

6,419

7,479

8,747

Current liabilities

1,634

2,501

2,806

2,841

3,324

3,887

Net current assets

3,706

4,700

5,453

5,059

5,960

7,299

Mis. Exp. not written off

112

Total assets

11,767

13,169

18,243

17,961

19,341

21,089

August 18, 2017

Cipla | 1QFY2018 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E FY2019E

Profit before tax

1,881

2,141

2,007

1,222

2,145

2,636

Depreciation

373

457

542

1,323

831

927

(Inc)/Dec in Working Capital

(149)

(722)

(629)

(23)

(844)

(1,026)

Direct taxes paid

431

537

632

Cash Flow from Operations

1,673

1,339

1,287

2,522

2,132

2,537

(Inc.)/Dec.in Fixed Assets

(930)

(684)

(1,213)

(1,706)

(1,200)

(Inc.)/Dec. in Investments

1,824

(117)

(216)

Other income

Cash Flow from Investing

894

(616)

(1,330)

(1,922)

(1,200)

Issue of Equity

Inc./(Dec.) in loans

311

545

3,577

(1,071)

Dividend Paid (Incl. Tax)

(188)

Others

(2,658)

(692)

(3,039)

412

(564)

(687)

Cash Flow from Financing

(2,535)

(335)

350

(847)

(752)

(875)

Inc./(Dec.) in Cash

389

307

(247)

180

462

Opening Cash balances

143

175

564

871

624

804

Closing Cash balances

175

564

871

624

804

1,266

August 18, 2017

Cipla | 1QFY2018 Result Update

Key Ratio

Y/E March

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation Ratio (x)

P/E (on FDEPS)

34.1

30.0

34.9

47.1

30.2

24.5

P/CEPS

26.9

23.3

22.4

20.3

19.6

16.5

P/BV

4.7

4.4

4.1

3.8

3.4

3.0

Dividend yield (%)

0.3

EV/Sales

4.9

4.1

3.8

3.5

3.0

2.5

EV/EBITDA

27.0

23.3

23.5

23.7

19.6

15.7

EV / Total Assets

4.1

3.7

2.8

2.6

2.3

Per Share Data (`)

EPS (Basic)

17.3

19.6

16.9

12.5

19.5

24.1

EPS (fully diluted)

17.3

19.6

16.9

12.5

19.5

24.1

Cash EPS

21.9

25.3

26.3

29.0

30.1

35.9

DPS

2.0

Book Value

125.2

134.5

143.3

155.9

173.1

194.8

Dupont Analysis

EBIT margin

14.5

13.8

10.6

5.6

10.3

11.3

Tax retention ratio

75.4

75.0

80.8

85.3

75.0

Asset turnover (x)

0.9

1.0

0.9

0.8

0.9

1.0

ROIC (Post-tax)

10.1

10.3

7.9

4.0

7.3

8.8

Cost of Debt (Post Tax)

9.9

4.3

4.8

2.9

Leverage (x)

0.1

0.0

1.0

2.0

3.0

Operating ROE

10.1

10.3

7.9

5.2

16.1

26.3

Returns (%)

ROCE (Pre-tax)

12.8

12.9

9.1

4.4

9.2

10.9

Angel ROIC (Pre-tax)

15.3

17.8

14.1

7.2

14.2

16.5

ROE

14.6

15.1

12.2

8.4

11.9

13.1

Turnover ratios (x)

Asset Turnover (Gross Block)

1.8

1.6

1.7

Inventory / Sales (days)

100

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

124

116

115

112

103

Solvency ratios (x)

Net debt to equity

0.1

0.4

0.3

0.2

Net debt to EBITDA

0.6

0.5

2.0

1.6

1.3

0.9

Interest Coverage (EBIT/Int.)

August 18, 2017

Cipla | 1QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months.

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Disclosure of Interest Statement

Cipla

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 18, 2017