Buy Cipla Ltd For Target Rs.856 - HDFC Securities
Globally, Cipla is the second largest inhaler (MDI + DPI- metered dose and dry powder) selling company by volume and four of its respiratory brands are listed among the Top-50 medicine brands in India. Company is ranked no.1 in therapeutic areas such as respiratory and urology in domestic market. Company has 8 brands amongst top-100 brands in IPM while 22 brands feature in top-300 brands. Chronic business registered 12% yoy rise in FY20 and formed ~55% of domestic formulations business in FY20. The management’s concentrated efforts to generate synergies by merging all the three businesses in India under one umbrella is expected to yield significant benefits. Sustained traction in chronic business and market leadership position in therapies such as respiratory, inhalation and urology segments bodes well. Along with this, likely recovery in the acute therapy and improvement in the hospital business would drive India business.
Expected traction in new launches in the US and a healthy pipeline would drive the revenues for the US business. South Africa business is also expected to sustain strong double-digit growth momentum. In addition, Cipla is expected to benefit from COVID-related opportunities in India as well as in emerging markets. The COVID-19 drug constituted 5% of the company's overall sales, of which a large part should be sustained. According to the IQVIA report (Mar 2020), US FDA approval for gAlbuterol has strengthened Cipla’s respiratory franchise in the US market, which provides ample growth visibility. Also the filing of Advair with the US FDA will further add to its respiratory portfolio. Also, the management is working closely with the US FDA to resolve issues at its Goa plant (WL indicated by the US FDA) and has submitted its response to the regulator. The cost optimization measures are expected to sustain going ahead leading to an improvement in the margin trajectory. Improved cash generation enabled the company to prepay debt of Rs 1,939cr in FY20.
Valuations and View:
Cipla is one of the few companies least likely to see revenue pressure as a) Domestic business including trade generics and initial evidence of consumer business point to a healthy growth trajectory; b) limited competition US launches; c) South Africa branded business remain on firm footing. While domestic acute portfolio could be under pressure in this season, Emerging Market business is expected to post steady growth. Proventil's initial trajectory shows that it could add significant revenues for FY21/22 at above-average company margins. Going forward, India and South Africa which comprises of ~55% of overall revenues will continue to be the cash cow for the company, generating consistent free cash flows. Apart from this, it has constantly been in the investment phase in developed markets mainly in US and has a strong range of inhaler products in the pipeline. Strong momentum in the US respiratory portfolio along with consistent focus on FCF generation and debt reduction are likely to drive future earnings growth. We expect Cipla’s topline and PAT to see CAGR of 12% and 30%, respectively, over FY20-23E. US business is expected to grow at 10% CAGR led by steady base business and new limited competition launches while domestic formulations may grow at 14% CAGR over FY20-23E.
In the US, a strong set of product launches would fuel the growth. Management reaffirmed its guidance of launching 1 respiratory product every year in the US. As most respiratory inhaler products are going to be limited competition, it will lead to sustainable margin expansion in the US. Overall, we see domestic formulations business leading growth, while the South African business too is expected to clock healthy growth. The company has reported strong set of results for H1FY21 with margins expanding phenomenally attributable to cost optimisation measures. Consequently, this is likely to improve the margin trajectory going ahead. Currently, the stock trades at 24x/18x its FY21/FY23E earnings. Company is working closely with US FDA to resolve issues at its Goa plant, any positive outcome would re-rate the stock. Healthy topline growth, strong earnings visibility and a healthy balance sheet augurs well for the stock. We feel investors can buy Cipla on dips to Rs 712-720 (20.5x FY22E EPS) band and add more on dips to Rs 660-668 band (19.0x FY22E EPS) for base case target of Rs 804 (based upon 23.0x FY22E earnings) and bull case target of Rs 856 (based upon 24.5x FY22E earnings).
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