Fundamental Pick of the Week

Date: 25 July, 2008

Every week ICICIdirect research team will select a stock based on fundamental and/or technical parameter, which is likely to return 20% over a 3-6 month perspective.

CIPLA (CIPLA)
Company Background

Current Price: 232.00

Target Price: 278.00

Potential upside: 20% Time Frame: 3-6 mths

Cipla was started by Dr. Khwaja Abdul Hamied as 'The Chemical, Industrial & Pharmaceutical Laboratories' in Mumbai. Cipla was officially opened on September 22, 1937, with its first products ready to hit the market. Currently, Cipla's products & services are categorized into prescription, animal products, OTC, bulk drugs, flavours & fragrances, agrochemicals and technology, with a presence across 170 countries. For the domestic market, Cipla is a diversified and integrated company with several manufacturing facilities and presence over various therapeutic segments. In May 2007, Cipla overtook Ranbaxy and GlaxoSmithKline India (GSK) to become the largest pharmaceutical company in the domestic market to become the market leader in retail market for pharmaceutical products. Investment rationale Geographical & therapeutic diversification reduces risk Cipla's revenue sources are well spread out in terms of geography (170 countries) and business segments (strong presence across various therapeutic segments). The distributed presence across geographies as well as therapy areas lends a significant amount of stability, sustainability and scalability to the revenues, which have grown at a sturdy rate of 23% CAGR over FY03-08. During the period of FY03-08, the revenue profile has seen a significant rise in the contribution arising from exports (37% in FY03 to 51.5% in FY08). Cipla has not only stuck to its time-tested strategy to sustain growth, but also has been quick to reverse engineer and scale-up its products portfolio at low cost. While its peers ventured into drug discovery research and the US generics market on their own, Cipla preferred the partnership model and consciously avoided taking the risks on its books. Continuing with its strategy to fortify operations in newer markets, Cipla's top and bottom-lines has grown at a brisk pace, at the same time hedging its risks. The company entered into numerous partnerships with large US-based generics companies, in which Cipla would develop and manufacture the product, while the partner would file the ANDA and market the same in the US. Strong domestic business Cipla is the leader in the retail prescription market in India with various products featuring in the top-300 brands in the market. It has a robust basket of products, which includes over 1,500 formulations distributed through a strong distribution network across the country. Moreover, the company boasts of a diversified therapy mix with a growing presence across major therapeutic areas. Additionally, Cipla has a dominant position in anti-asthma and anti-retroviral therapy areas with a significant market share. Furthermore, the company has a respectable market share in top therapy areas such as anti-infectives, cardiology and opthalmology. Based on its speed to market, strong science and effective marketing through its experienced field force of over 3000-people, the company has established strong brand equity with physicians in India. In addition, Cipla is trying to build up on the rural markets, in-licensing agreements and expanding exports in order to mitigate the negative impact of the IPR regime,. Partnership model for developed markets Buoyed by the success of the partnership model in less-regulated markets such as South & Central America, Africa, Australia and Asia, Cipla began replicating the strategy for the high-risk and high-return regulated or developed markets. As per a typical partnership agreement, Cipla manufactures the specified products, while its partner is responsible for the regulatory, legal and marketing aspects. Over the past few years, Cipla has partnered 8 leading generics companies in the US.

Fundamental Pick 1

Fundamental Pick of the Week

Anti-retroviral and asthma drugs Key to growth Anti-retroviral and anti-asthma drugs contribute 35-38% each to Cipla's top-line. With respect to dosage-form exports, the contribution is higher at 49%, split into 35% and 14% for anti-retroviral and anti-asthma segments respectively. The outlook for growth remains buoyant with Cipla's unique positioning 'world-class products at low cost'. As for anti-retrovirals, considering the devastating impact of AIDS in Africa, the company has tied up with local governments, WHO, UNICEF and NGOs. This has enabled patients to procure medicines at 80-85% discount to that of innovators leading to higher sales volumes for Cipla's products providing an impetus to its top-line. On the anti-asthma front, the company is slowly and steadily replicating its domestic success model in the emerging and European markets. In Europe, its budesonide inhalers have been approved in Germany and Portugal, while Salbutamol MDI in Denmark. In addition, few more inhalers are in the pipeline for registration. Cipla is among the top global manufacturers of inhalers with a capacity of 46 million per annum. Biotherapeutics A new and promising area Cipla has identified biopharmaceuticals as one of the key growth drivers in the future. In this regard, the company signed an agreement with Avesthagen. Avesthagen focuses on research & development, while Cipla would handle marketing and distribution of the biotherapeutic products. The key therapy areas of interest are auto-immune disorders, cardiology and anticancer, with the first product likely to hit the market in 3-4 years. We believe that the focus would be on developing generic versions of biotech products or biogenerics, which is estimated to be a US$7- 9bn opportunity by '10. Risk & concern Cipla received a notice from the National Pharmaceutical Pricing Authority, (NPPA) on account of overcharging for medicines. The matter is currently in court and the company has not deposited any amount with the government (NPPA). The total liability in this case could be in the range of Rs 750 crore. Financials From last three quarters, Cipla has been reporting improved performance. Starting December 2006 quarter, the company has seen a lull period in consecutive 4 quarters. Nevertheless the situation seems to be back on track. In Q1FY09, it reported consolidated net profit growth of 17% YoY to Rs 140 crore. Its total operating income grew at a robust 34% YoY rate to Rs1223 crore. Revenues from exports increased at 50% YoY to Rs 600 crore on the back of strong performance in API exports, which grew 117% YoY to Rs 177 crore. The performance in exports was also helped by rupee depreciation vis--vis the US dollar. Furthermore, the revenues from the domestic business grew a healthy 16% YoY to Rs 586 crore. The EBITDA margin of Cipla expanded 455 basis points to 22.4% driven by the improved revenue profile and depreciation in rupee. Valuations We expect improvement in numbers of Cipla on account of commercial launches of key products by the company's US partners, complete roll-out of CFC free inhalers in Europe, strong growth in dosage form exports and higher volume growth from huge capex in the past three years. Currently, the stock trades 21x FY09E EPS of 10.9 and 17x FY10E EPS of Rs 13.37. We rate the stock an OUTPERFORMER with a price target of Rs 278 for an investment horizon of 6 months.
Key Financial Ratios
2007/03 2006/03 20.26 22.94 65.83 2 23.27 27.02 0.23 2.28 45.54 2005/03 13.66 15.5 51.47 3.5 22.41 22.77 0.12 2.02 44.86 2004/03 51.14 57.87 209.07 15 21.96 24.13 0.16 1.93 32.96 2003/03 41.31 46.05 176.71 10 21.87 22.16 0.08 1.98 74.15

EPS CEPS Book Value Dividend/Share OPM RONW Debt/Equity Ratio Interest Cover

8.59 9.92 41.52 2 23.07 19.61 0.03 2.69 79.53

Fundamental Pick 2

Fundamental Pick of the Week

Technical Outlook

The stock after trading in a broad range of 198-224 has given a clear break out signal in the charts. The stock has formed a strong base around 215 levels and has moved up. The Price rise has come with high volume suggesting strength in the stock. The stock on the weekly chart has shown constant uptrend after touching a low of 160 during January 2008. Among the Oscillators RSI is in up moment and is showing strength for further price rise. The stock is trading above its 200 day moving average which is placed at 188 levels, where as MACD and stochastic has supported the recent price rise. The immediate support comes around 191 levels. One can expect a target around 275/295 in coming months.

ICICIdirect Research Desk

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