COMPANY UPDATE 26 DEC 2018 Cipla BUY HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters Negatives priced-in The recently diagnosed issues related to supply constraints in one of the sterile plants, US sanctions on Iran, war in Yemen, falling prices in the tender business and higher inflation in APIs are likely to persist over the next 2-3 quarters. However, the stock has also fallen ~23% from Rs 671/share (Sep- 18) and consensus earnings have been cut by 14- 15%. The management is still confident in achieving at least 10% revenue CAGR and 18-20% EBITDA margin over FY20-21E owing to the US, India, and SA segments (~70% of revenues). The injectable and inhaler launches in the US will be the key triggers. At present, the stock is trading at 23/17x FY20/21 P/E, at a ~20% discount to its historical average. We see this as a good opportunity to accumulate, with Cipla generating US$ 150mn+ FCFs annually on the back of robust branded franchises in India and South Africa. It is also consistently receiving complex product approvals in the US, which are likely to drive the top line and make the US business profitable. Upgrade to BUY with a TP of Rs 605 (22x Dec-20E EPS). Ongoing challenges: Cipla is facing multiple issues: (1) Supply constraints due to capacity rebalancing have cut quarterly sales by Rs ~1bn; (2) Iran and Yemen sales are expected to decline from US$ 70-80mn in FY18 to US$ 30-40mn for FY19E due to geopolitical concerns; and (3) The South Africa tender biz (40% of SA sales) could face double-digit price erosion. We expect these issues to normalize in FY20/21. Guidance: Resolving supply constraints, acceleration in the US business and traction gained in India and SA branded businesses will drive revenue growth at 10% plus over FY20-21E. Cost rationalization, ramp-up in the US, and rebalancing within segments will help maintain EBITDA margin at 18-20%. Focus on DTM: Quarterly US sales to reach US$ 120- 130mn by FY19-end. The DTM is growing at double digits and should cross US$ 180-200mn in sales this year. B2B revenue slumped from US$ 150mn (FY18) to US$ ~70mn now, having largely bottomed-out. The low-margin Invagen business is likely to remain flat. Lucrative launches over FY20-21 include gProventil, Tramadol, and potentially gAdvair. Growing branded businesses: Domestic growth (12- 14%) will be led by in-licensed products and chronic therapies, with the acute portfolio remaining steady. South Africa’s private business is growing at 14%, 2-3x the market rate. The Mirren acquisition is a high- margin OTC business, growing at strong double-digits. Financial Summary (Rs bn) Year Ending March FY18 FY19E FY20E FY21E Net Sales 152.19 161.97 184.07 209.97 EBITDA 28.26 28.18 34.41 42.11 APAT 14.94 14.06 18.02 23.55 Diluted EPS (Rs/sh) 18.6 17.5 22.4 29.2 P/E (x) 27.9 29.6 23.1 17.7 RoE (%) 11.2 9.5 11.1 13.1 Source: Company, HDFC sec Inst Research INDUSTRY PHARMA CMP (as on 24 Dec 2018) Rs 519 Target Price Rs 605 Nifty 10,664 Sensex 35,470 KEY STOCK DATA Bloomberg CIPLA IN No. of Shares (mn) 805 MCap (Rs bn) / ($ mn) 418/5,971 6m avg traded value (Rs mn) 1,709 STOCK PERFORMANCE (%) 52 Week high / low Rs 678 /503 3M 6M 12M Absolute (%) (19.6) (15.7) (13.7) Relative (%) (17.3) (15.1) (18.2) SHAREHOLDING PATTERN (%) Promoters 36.7 FIs & Local MFs 13.8 FPIs 25.6 Public & Others 23.9 Source : BSE Amey Chalke [email protected]+91-22-6171-7321 Eshan Desai [email protected]+91-22-6639-2476
Transcript
COMPANY UPDATE 26 DEC 2018
Cipla BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Negatives priced-inThe recently diagnosed issues related to supply constraints in one of the sterile plants, US sanctions on Iran, war in Yemen, falling prices in the tender business and higher inflation in APIs are likely to persist over the next 2-3 quarters. However, the stock has also fallen ~23% from Rs 671/share (Sep-18) and consensus earnings have been cut by 14-15%. The management is still confident in achieving at least 10% revenue CAGR and 18-20% EBITDA margin over FY20-21E owing to the US, India, and SA segments (~70% of revenues). The injectable and inhaler launches in the US will be the key triggers.
At present, the stock is trading at 23/17x FY20/21 P/E, at a ~20% discount to its historical average. We see this as a good opportunity to accumulate, with Cipla generating US$ 150mn+ FCFs annually on the back of robust branded franchises in India and South Africa. It is also consistently receiving complex product approvals in the US, which are likely to drive the top line and make the US business profitable. Upgrade to BUY with a TP of Rs 605 (22x Dec-20E EPS).
Ongoing challenges: Cipla is facing multiple issues: (1) Supply constraints due to capacity rebalancing have cut quarterly sales by Rs ~1bn; (2) Iran and Yemen sales are expected to decline from US$ 70-80mn in FY18 to US$ 30-40mn for FY19E due to geopolitical concerns; and (3) The South Africa tender biz (40% of
SA sales) could face double-digit price erosion. We expect these issues to normalize in FY20/21.
Guidance: Resolving supply constraints, acceleration in the US business and traction gained in India and SA branded businesses will drive revenue growth at 10% plus over FY20-21E. Cost rationalization, ramp-up in the US, and rebalancing within segments will help maintain EBITDA margin at 18-20%.
Focus on DTM: Quarterly US sales to reach US$ 120-130mn by FY19-end. The DTM is growing at double digits and should cross US$ 180-200mn in sales this year. B2B revenue slumped from US$ 150mn (FY18) to US$ ~70mn now, having largely bottomed-out. The low-margin Invagen business is likely to remain flat. Lucrative launches over FY20-21 include gProventil, Tramadol, and potentially gAdvair.
Growing branded businesses: Domestic growth (12-14%) will be led by in-licensed products and chronic therapies, with the acute portfolio remaining steady. South Africa’s private business is growing at 14%, 2-3x the market rate. The Mirren acquisition is a high-margin OTC business, growing at strong double-digits.
Source: Company, HDFC sec Inst Research R&D Spend: To Remain Steady In Proportion To Sales
Source: Company, HDFC sec Inst Research
The US B2B Segment Has Halved Over FY18
Source: Company, HDFC sec Inst Research
161 ANDAs Approved In The US As Of 2QFY19
Source: Company, HDFC sec Inst Research
The decline in the US B2B segment is being balanced by the growing DTM business, while the low-margin Invagen business remains largely steady. Going ahead, new launches will drive double-digit growth in the US. R&D spend will continue at a steady rate in proportion to sales, owing to the strong filings run rate Cipla is on-track to file for 20 products in FY19
7 8 9 21 26 26 31 37 43
19.9
27.2
7.6
36.4
24.3
10.0
19.7 18.0 18.3
-
5
1 0
1 5
2 0
2 5
3 0
3 5
4 0
4 5
5 0
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
US Revenue (Rs bn) YoY Growth (%)
4 5 7 9 11 11 12 14 16
4.45.1
6.3 6.6
7.67.1
7.5 7.5 7.4
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
R&D Expenses (Rs bn) R&D to Sales (%)
30-35
200~150
75~220
170
0
100
200
300
400
500
1st Year Post Invagen Acquisition
FY19E
DTM (US$ mn) B2B (US$ mn) Invagen (US$ mn)
61
843
9
11
2
53
2
21
38
3
5
0
20
40
60
80
100
120
140
160
180
Approved ANDAs Tentatively Approved ANDAs
Under Approval ANDAs
Cipla PEPFAR Invagen Partnered ANDAs
CIPLA : COMPANY UPDATE
Page | 3
Ke
Key Approvals In The US Over The Last One Year
Date Type Generic Name Brand Name Form Innovator US Sales (US$ mn)
Source: AIOCD, HDFC sec Inst Research *Ex-Cipla & Innovator
CIPLA : COMPANY UPDATE
Page | 4
Estimate 11% CAGR In Revenue Over FY18-21E
Source: Company, HDFC sec Inst Research Domestic Business: Chronic Segment To Drive Growth
Source: Company, HDFC sec Inst Research
India And North America Account For Nearly 60% Of Total Revenue
Source: Company, HDFC sec Inst Research
Therapy-wise Breakup – Nov 2018 MAT
Source: AIOCD, HDFC sec Inst Research
India39%
North America
17%
SAGA22%
EM11%
EU4%
API4%
Others3%
Respiratory34%
Anti-Infectives
22%Cardiac
13%
Gastro Intestinal
7%
Urology5%
Neuro / CNS4%
Ophthal3%
Analgesics3%
Derma2%
Others7%
Revenue growth will be driven by resolving supply constraints, acceleration in the US, and traction gained in India and SA branded businesses Domestic sales are expected to grow by ~12% YoY The domestic business portfolio is acute-heavy; however, growth is driven by chronic therapies
Gross Margin: Expected To Expand ~100bps Over FY18-21E
Source: Company, HDFC sec Inst Research Employee Cost: To Increase In Absolute Terms Owing To US Front-end
Source: Company, HDFC sec Inst Research
EBITDA Margin: Anticipate A Rebound To ~20% By FY21E
Source: Company, HDFC sec Inst Research
EPS: Estimate ~16% CAGR Over FY18-21E
Source: Company, HDFC sec Inst Research
Pressure on API costs still persists, to ease out in the coming years Cost rationalization, ramp-up in the US, and rebalancing within segments will help maintain EBITDA margin in the range of 18-20% Employee cost is expected to increase at single-digits Earnings growth to stabilize after a weak FY19E
64.3
61.6
63.1 63.163.7
64.365.0 65.3 65.6
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
Gross Margin (%)
10 15 20 24 26 27 29 31 33
12.5
15.317.4 17.7 18.0 17.7 17.6 16.8 15.9
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
Employee Cost (Rs bn) Employee Cost to Sales (%)
22 21 22 25 25 28 28 34 42
26.5
21.119.1 18.0 16.9
18.6 17.4
18.7 20.1
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
EBITDA (Rs bn) EBITDA Margin (%)
19 17 15 17 13 19 17 22 29
35.0
(10.1)(15.0)
15.2
(24.1)
44.3
(5.9)
28.2 30.7
0 .0
5 .0
1 0 .0
1 5 .0
2 0 .0
2 5 .0
3 0 .0
3 5 .0
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
EPS (Rs/Sh) YoY Growth (%)
CIPLA : COMPANY UPDATE
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Scale-up In Operations Will Drive Free Cashflows
Source: Company, HDFC sec Inst Research
Return Ratios To Improve Over FY20-21E
Source: Company, HDFC sec Inst Research
Cipla Has Traded At 28.5x One Year Fwd PE Over The Last 10 Years
Source: Company, HDFC sec Inst Research
Favourable leverage will enable Cipla to capitalize on any acquisition opportunity, while the company is keen on expanding its specialty business At CMP, Cipla is trading at 23/17x FY20/21E EPS, which is at a ~20% discount to its historical average
6 10 3
(25)
13 7 24 9 13
(0.1)
0.1 0.1
0.3
0.2
0.1
(0.0)(0.1)
(0.1)
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
Free Cashflow (Rs bn) Net D/E (x)
18.5 14.6
11.4 12.3
8.611.2
9.511.1
13.1
20.3
14.5
10.0 9.7
6.58.6 7.8
9.311.2
0.0
5.0
10.0
15.0
20.0
25.0
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY21
E
RoE (%) RoCE (%)
17.5 21.1 15.3 11.6 10.1 6.2 8.1 7.9 10.5
Oct-1830.6
Nov-1825.8
0
10
20
30
40
50
60
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
Jan-
17
Jan-
18
Jan-
19
Jan-
20
RoIC (%) 1 yr fwd P/E (x) PE Average (Oct-08 - Oct-18)
?
CIPLA : COMPANY UPDATE
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Segmental Quarterly Performance (Rs mn) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 India (Rx + Gx) 12,700 16,460 16,010 13,530 15,440 16,440 North America 6,460 6,180 6,500 6,750 6,700 7,580 South Africa 4,670 5,170 5,210 5,330 5,750 5,030 Global Access 2,620 4,030 3,490 2,860 2,560 2,510 Emerging Markets 4,630 4,540 3,710 3,940 4,690 4,720 Europe 1,650 1,510 1,710 1,360 1,340 1,410 Global API 1,300 2,130 1,480 1,350 2,000 1,710 Others 1,220 800 1,030 1,860 910 720 Total 35,250 40,820 39,140 36,980 39,390 40,120 Source: HDFC sec Inst Research
The tender business has halved over previous levels of US$ 150mn to US$ 70mn now; however, it has largely bottomed-out Tender business volumes are likely to be maintained, price erosion will continue at double-digits Cipla had combined revenue of US$ 70-80mn in Iran and Yemen in FY18 This was largely one-off, and expected to decline to US$ 40-50mn in FY19 While 1HFY19 was largely in-line, 2H would be poor due to geopolitical issues in the region The branded businesses in South Africa and India, along with traction gained in the US will drive future growth
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
RECOMMENDATION HISTORY
400
450
500
550
600
650
700
Dec-
17
Jan-
18
Feb-
18
Mar
-18
Apr-
18
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Nov-
18
Dec-
18
Cipla TPDate CMP Reco Target
11-Jan-18 612 NEU 665 13-Apr-18 556 NEU 631 23-May-18 524 NEU 565 10-Jul-18 623 NEU 565 9-Aug-18 633 NEU 595 10-Oct-18 639 NEU 660 6-Nov-18 564 NEU 605 26-Dec-18 519 BUY 605
CIPLA : COMPANY UPDATE
Page | 13
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