3QFY2017 Result Update | Pharmaceutical

February 14, 2017

Cipla

SELL

CMP

`581

Performance Highlights

Target Price

`465

Y/E March (` cr)

3QFY2017 2QFY2017

% chg qoq 3QFY2016

% chg yoy

Investment Period

Net sales

3,550

3,672

(3.3)

3,070

15.6

Other income

251

106

135.7

149

68.7

Stock Info

Gross profit

2,249

2,342

(4.0)

1,843

22.0

Sector

Pharmaceutical

Operating profit

580

602

(3.5)

382

52.0

Market Cap (` cr)

46,764

Adj. Net profit

375

354

5.8

258

45.2

Net Debt (` cr)

563

Beta

0.6

Source: Company, Angel Research

52 Week High / Low

622/458

Cipla posted numbers lower than expected for 3QFY2017. The company

Avg. Daily Volume

1,70,389

reported sales of `3,550cr v/s `3,737cr expected, registering a yoy growth of

Face Value (`)

15.6%, mainly aided by domestic formulations. Domestic at `1,408cr registered

BSE Sensex

28,352

a yoy growth of 19.1%, while exports at `2,239cr posted yoy growth of 13.7%.

Nifty

8,805

On operating front, the EBITDA margins came in at 16.4% (v/s 16.5% expected)

Reuters Code

CIPL.BO

v/s 12.4% in 3QFY2016. Consequently, Adj. PAT came in at `375cr (v/s `498cr

Bloomberg Code

CIPLA@IN

expected) v/s `258cr in 3QFY2016, yoy growth of 45.2%. We maintain our SELL

rating on the stock.

Shareholding Pattern (%)

Promoters

36.7

Results much lower than our expectations: Company posted sales of `3,550cr v/s

MF / Banks / Indian Fls

20.1

`3,737cr expected, registering a yoy growth of 15.6%, mainly aided by domestic

FII / NRIs / OCBs

24.4

formulations. Domestic at `1,408cr registered a yoy growth of 19.1%, while

Indian Public / Others

18.8

exports at `2,239cr posted yoy growth of 13.7%. On operating front, the EBITDA

margins, came in at 16.4% (v/s 16.5% expected) v/s 12.4% in 3QFY2016.

Consequently, Adj. PAT came in at `375cr (v/s `498cr expected) v/s `258cr in

Abs. (%)

3m 1yr

3yr

3QFY2016, yoy growth of 45.2%.

Sensex

5.7

23.3

40.4

Cipla

5.7

10.0

52.6

Outlook and valuation: We expect the company to post a 16.3% CAGR in

net sales to `18,089cr and EPS to record a 14.2% CAGR to `24.5 over

FY2016-18E. We reiterate our SELL stance on the stock.

3-Year Daily Price Chart

800

Key financials (Consolidated)

700

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

600

500

Net sales

11,681

13,372

15,378

18,089

400

% chg

19.8

14.5

15.0

17.6

300

200

Adj. Net profit

1,578

1,506

1,546

1,964

100

% chg

13.6

(4.5)

2.7

27.0

EPS (`)

19.6

18.8

19.3

24.5

EBITDA margin (%)

17.7

16.4

15.7

16.8

Source: Company, Angel Research

P/E (x)

29.6

31.0

30.2

23.8

RoE (%)

15.1

13.3

12.3

13.9

RoCE (%)

12.9

10.7

9.8

12.2

P/BV (x)

4.3

3.9

3.5

3.1

Sarabjit Kour Nangra

EV/Sales (x)

4.1

3.8

3.3

2.7

+91 22 3935 7600 Ext: 6806

EV/EBITDA (x)

23.0

20.7

16.3

[email protected]

Source: Company, Angel Research; Note: CMP as of February 13, 2017

Please refer to important disclosures at the end of this report

Cipla | 3QFY2017 Result Update

Exhibit 1: 3QFY2017 ( Consolidated) performance

Y/E March (` cr)

3QFY2017

2QFY2017

% chg QoQ

3QFY2016

% chg yoy 9MFY2017 9MFY2016

% chg yoy

Net sales

3,550

3,672

(3.3)

3,070

15.6

10,778

10,166

6.0

Other income

250.7

106.4

135.7

148.6

68.7

476.2

400.1

19.0

Total income

3,801

3,778

0.6

3,218

18.1

11,254

10,566

6.5

Gross profit

2249

2342

(4.0)

1843

22.0

6776

6463

4.8

Gross margin

63.3

63.8

60.0

62.9

63.6

Operating profit

580

602

(3.5)

382

52.0

1699

2036

(16.5)

OPM (%)

16.4

12.4

15.8

20.0

Interest

59.3

35.2

31.4

88.9

126

125

0.8

Depreciation

258

229

12.5

177

45.9

691

400

72.7

PBT

514

444

15.9

322

59.4

1359

1911

(28.9)

Provision for taxation

128

78.4

154.8

255

443

(42.3)

PAT before extra-ordinary item

386

372

3.8

272

41.8

1103

1468

(24.8)

Share of Profit /( loss ) of asso.

(9)

(17)

(3)

(7)

Extra-ordinary items/(income)

PAT after extra-ordinary item

375

354

5.8

261

43.9

1068

1453

(26.5)

Adj. PAT

375

354

5.8

258

45.2

1068

1453

(26.5)

EPS (`)

4.7

4.4

3.2

13.3

18.1

Source: Company, Angel Research

Exhibit 2: 3QFY2017 - Actual vs. Angel estimates

(` cr)

Actual

Estimates

Variance

Net sales

3,550

3,737

(5.0)

Other income

251

117

115.0

Operating profit

580

618

(6.1)

Tax

128

32.5

Net profit

375

498

(24.7)

Source: Company, Angel Research

Top-line growth lower than expectation

Company posted sales of `3,550cr v/s `3,737cr expected, registering a yoy

growth of 15.6%, mainly aided by domestic formulations. Domestic formulation at

`1,408cr registered a yoy growth of 19.1%, while exports at `2,239cr, posted yoy

growth of 13.7%.

USA (`662cr) posted a yoy growth of 127%, mainly on the back of acquisitions.

The North America business (excluding the impact of one-offs and acquisitions)

registered growth of ~21% compared to last year in Dollar terms. Invagen

contributed ~50% of US sales. Cipla is now one of the fastest-growing generics

player in the US, strong DTM performance i.e. 8 of the 413 (20%) in IMS are in the

leadership (no 1) share position, while 23 of 41 (56%) products ranked among

Top 3 in their segments. During YTD Dec FY2017, 21 ANDAs have been filed. Of

these, 9 were P-IV with couple of them being FTF.

South Africa (ZAR1,023mn) registered a growth of ~13% over the last year.

Continued leadership position in Respiratory, CNS, Oncology & Musculo Skeletal

System segments with ~30% market share. Post integration of Actavis’ portfolio,

Cipla became the 4th largest pharma company in South Africa. Increased market

February 14, 2017

Cipla | 3QFY2017 Result Update

share to 5.8% in private market (IMS MAT Dec’16), up from 5% at the beginning of

the financial year. Focus on higher-margin tenders and exploring in-licensing

opportunities

Emerging market sales (US$110mn) posted an overall de-growth of ~17% yoy in

3QFY2017. Decline of emerging markets (outside of Sub-Saharan Africa and ex-

CGA) was driven by tender normalization. Cipla Global Access (CGA) de-growth

was due to tender phasing.

Exhibit 3: Sales Trend

3,000

2,500

2150

2239

2051

1,948

2,000

1833

1522

1449

1408

1,500

1194

1258

1,000

500

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Domestic

Export

Source: Company

Operating profit margin just in-line with expectation

On operating front, the EBITDA margins came in at 16.4% (v/s 16.5% expected)

v/s 12.4% in 3QFY2016, mainly on the back of base effect. The other expenses

during the quarter came in at `1,035cr, a rise of 17.4% yoy. Total R&D

investments for this quarter were at 6.2% of revenues v/s 8% in 2QFY2017.

Exhibit 4: OPM Trend

20.0

16.4

15.0

16.4

14.8

12.0

10.0

5.0

0.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company

February 14, 2017

Cipla | 3QFY2017 Result Update

Net profit lower than expectation

Consequently, Adj. PAT came in at `375cr (v/s `498cr expected) v/s `258cr in

3QFY2016, yoy growth of 45.2%. The Net profit came in lower than expected on

back of higher taxations.

Exhibit 5: Net Profit Trend

800

700

600

500

375

400

343

339

354

300

200

100

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company

Concall takeaways

 R&D as % of sales for the quarter stood at 6.2%; it is expected to be at ~8% in

FY2017 as against ~6.5% in FY2016.

 In USA, the company expects to file 25 ANDAs in FY2017.

 DPCO and Fixed Dosage Combinations ban in domestic market expected to

impact by ~2-3% for FY2017.

 Pending ANDAs at end-9MFY2017 stood at ~65 (incl. partnered products).

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 FY2016, with Africa, US

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

has a strong product pipeline of 168 ANDAs, out of which, 950 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.

During the quarter, the company strengthened its foothold in the US through the

acquisition of InvaGen Pharma and Exelan Pharma. The companies added a

pipeline of ~70 ANDAs of which 40 are approved (32 marketed) and 30 awaiting

approval. The company is likely to add over US$250mn in FY2017. It will also

provide manufacturing capabilities in the US. Overall, we expect the company’s

exports to grow at a CAGR of 19.1% during FY2016-18E.

February 14, 2017

Cipla | 3QFY2017 Result Update

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 FY2016. The

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

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 relating to

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

the company’s domestic formulation business to post a CAGR of 14% over

FY2016-18E.

Valuation: We expect the company to post a 16.3% CAGR in net sales to

`18,089cr and EPS to record a 14.2% CAGR to `24.5 over FY2016-18E. 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

FY2017E

FY2018E

Domestic growth (%)

13.0

15.0

Exports growth (%)

19.1

19.2

Growth in employee expenses (%)

15.0

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

15.7

16.8

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

February 14, 2017

Cipla | 3QFY2017 Result Update

Exhibit 8: Recommendation Summary

Company

Reco

CMP Tgt. price Upside

FY2018E

FY16-18E

FY2018E

(`)

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

Alembic Pharma

Neutral

556

18.3

2.4

11.4

(10.8)

27.5

25.3

Aurobindo Pharma Buy

664

877

32.1

14.0

2.3

9.8

18.1

22.5

26.1

Cadila Healthcare Accumulate

372

400

7.5

19.4

3.0

13.6

13.4

22.7

25.7

Cipla

Sell

581

465

(20.0)

23.8

2.7

16.3

14.2

12.2

13.9

Dr Reddy's

Neutral

2,965

20.8

2.7

11.9

1.7

16.2

15.9

Dishman Pharma Neutral

225

19.9

2.2

9.8

13.3

10.3

10.9

GSK Pharma*

Neutral

2,700

44.4

6.7

32.6

17.3

35.3

32.1

Indoco Remedies

Reduce

270

240

(11.1)

16.9

2.0

10.8

33.2

19.1

20.1

Ipca labs

Buy

522

613

17.5

26.5

1.8

12.0

36.5

8.8

9.4

Lupin

Buy

1,448

1,809

25.0

20.9

3.4

12.9

17.2

24.4

20.9

Sanofi India

Neutral

4,172

19.4

3.0

13.6

22.2

25.6

28.8

Sun Pharma

Buy

655

847

29.3

18.6

3.9

11.8

26.5

18.9

20.1

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.

February 14, 2017

Cipla | 3QFY2017 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Gross sales

8,196

9,902

11,861

13,587

15,615

18,368

Less: Excise duty

108.7

149.3

179.7

215.0

236.6

278.3

Net sales

8,087

9,753

11,681

13,372

15,378

18,089

Other operating income

193

348

306

Total operating income

8,279

10,100

12,029

13,678

15,684

18,395

% chg

17.9

22.0

19.1

13.7

14.7

17.3

Total expenditure

6,081

7,967

9,612

11,177

12,956

15,055

Net raw materials

2,953

3,875

4,556

5,118

5,890

6,928

Other mfg costs

641

827

993

1,142

1,313

1,510

Personnel

1,036

1,543

2,083

2,447

2,814

3,236

Other

1,451

1,722

1,981

2,470

2,940

3,381

EBITDA

2,005

1,786

2,069

2,195

2,422

3,035

% chg

35.0

(11.0)

15.9

6.1

10.3

25.3

(% of Net Sales)

24.8

18.3

17.7

16.4

15.7

16.8

Depreciation & amort.

330

373

457

542

676

732

EBIT

1,675

1,413

1,613

1,654

1,746

2,303

% chg

42.7

(15.6)

14.1

2.5

5.6

31.9

(% of Net Sales)

20.7

14.5

13.8

12.4

11.4

12.7

Interest & other charges

146

161

Other Income

235

266

209

(% of PBT)

11.4

14.1

12.4

10.4

10.0

7.9

Recurring PBT

2,069

1,881

2,141

2,007

2,099

2,656

% chg

39.3

(9.1)

13.8

(6.3)

4.6

26.5

Extraordinary exp./(Inc.)

(26.7)

PBT (reported)

2,095

1,881

2,141

2,007

2,099

2,656

Tax

544.3

463.4

535.3

439.6

524.8

664.0

(% of PBT)

26.0

24.6

25.0

21.9

25.0

PAT (reported)

1,551

1,417

1,606

1,567

1,574

1,992

Add: Share of earnings of asso.

(6)

(12)

(11)

(10)

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

1,545

1,388

1,578

1,506

1,546

1,964

ADJ. PAT

1,524

1,388

1,578

1,506

1,546

1,964

% chg

30.0

(8.9)

13.6

(4.5)

2.7

27.0

(% of Net Sales)

19.1

14.2

13.5

11.3

10.1

10.9

Basic EPS (`)

19.0

17.3

19.6

18.8

19.3

24.5

Fully Diluted EPS (`)

19.0

17.3

19.6

18.8

19.3

24.5

% chg

30.0

(8.9)

13.6

(4.5)

2.7

27.0

February 14, 2017

Cipla | 3QFY2017 Result Update

Balance sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

161

Preference Capital

Reserves & surplus

8,858

9,890

10,629

11,697

13,055

14,831

Shareholders funds

9,019

10,050

10,801

11,857

13,216

14,992

Minority interest

180

270

Total loans

966.9

1,247.9

1,701.8

5,191.4

4,000.0

Other long term liabilities

30.0

32.6

Long Term Provisions

50.4

77.4

168.4

154.9

Deferred tax liability

280.5

309.0

284.6

366.4

Total liabilities

10,347

11,767

13,169

17,872

18,039

19,815

APPLICATION OF FUNDS

Gross block

5,318

6,183

6,868

8,100

8,800

9,500

Less: acc. depreciation

1,708

2,180

2,634

3,176

3,852

4,584

Net block

3,610

4,003

4,234

4,924

4,948

4,916

Capital work-in-progress

378

442

Goodwill

2,493

2,735

5,713

Investments

2,532

709

640

757

Long Term Loans and Adv.

363

301

419

715

475

559

Current assets

4,775

5,340

7,201

8,262

8,318

10,503

Cash

143

175

564

871

168

916

Loans & advances

573

596

701

958

923

1,085

Others

4,058

4,569

5,936

6,432

7,228

8,502

Current liabilities

1,311

1,634

2,501

2,939

2,614

3,075

Net current assets

3,464

3,706

4,700

5,322

5,704

7,428

Mis. Exp. not written off

112

Total assets

10,347

11,767

13,169

17,872

18,039

19,815

February 14, 2017

Cipla | 3QFY2017 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Profit before tax

2,095

1,881

2,141

2,007

2,099

2,656

Depreciation

330

373

457

542

676

732

(Inc)/Dec in Working Capital

(667)

(149)

(722)

(611)

(846)

(1,060)

Direct taxes paid

518

431

537

632

Cash Flow from Operations

1,241

1,673

1,339

1,306

1,929

2,328

(Inc.)/Dec.in Fixed Assets

(698)

(930)

(684)

(1,232)

(700)

(Inc.)/Dec. in Investments

(1,263)

1,824

(117)

Other income

Cash Flow from Investing

(1,961)

894

(616)

(1,349)

(700)

Issue of Equity

Inc./(Dec.) in loans

957

311

545

3,476

(1,191)

Dividend Paid (Incl. Tax)

(188)

Others

(2,658)

(692)

(2,938)

(553)

(692)

Cash Flow from Financing

773

(2,535)

(335)

350

(1,932)

(880)

Inc./(Dec.) in Cash

389

307

(703)

748

Opening Cash balances

143

175

564

871

168

Closing Cash balances

143

175

564

871

168

916

February 14, 2017

Cipla | 3QFY2017 Result Update

Key Ratio

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

30.6

33.6

29.6

31.0

30.2

23.8

P/CEPS

24.9

26.5

22.9

22.8

21.0

17.3

P/BV

5.2

4.6

4.3

3.9

3.5

3.1

Dividend yield (%)

0.3

EV/Sales

5.8

4.9

4.1

3.8

3.3

2.7

EV/EBITDA

23.5

26.6

23.0

20.7

16.3

EV / Total Assets

4.6

4.0

3.6

2.8

2.5

Per Share Data (`)

EPS (Basic)

19.0

17.3

19.6

18.8

19.3

24.5

EPS (fully diluted)

19.0

17.3

19.6

18.8

19.3

24.5

Cash EPS

23.4

21.9

25.3

25.5

27.7

33.6

DPS

2.0

Book Value

112.3

125.2

134.5

147.7

164.6

186.7

Dupont Analysis

EBIT margin

20.7

14.5

13.8

12.4

13.0

14.4

Tax retention ratio

74.0

75.4

75.0

78.1

75.0

Asset turnover (x)

0.9

1.0

0.9

1.0

ROIC (Post-tax)

14.0

10.1

10.3

8.9

8.8

10.8

Cost of Debt (Post Tax)

5.0

9.9

4.3

3.7

2.6

3.0

Leverage (x)

0.0

0.1

0.0

1.0

2.0

Operating ROE

14.4

10.1

10.3

8.9

14.9

26.3

Returns (%)

ROCE (Pre-tax)

18.3

12.8

12.9

10.7

11.1

13.5

Angel ROIC (Pre-tax)

19.3

15.3

17.8

16.3

17.7

21.2

ROE

18.3

14.6

15.1

13.3

13.7

15.2

Turnover ratios (x)

Asset Turnover (Gross Block)

1.7

1.8

1.9

2.0

Inventory / Sales (days)

101

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

131

124

116

115

116

120

Solvency ratios (x)

Net debt to equity

0.1

0.4

0.3

0.2

Net debt to EBITDA

0.4

0.6

0.5

2.0

1.4

0.8

Interest Coverage (EBIT/Int.)

February 14, 2017

Cipla | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

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and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a

registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/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.

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.

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. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the

contrary view, if any.

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document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way

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While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

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or in connection with the use of this information.

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)

February 14, 2017