3QFY2013 Result Update | Pharmaceutical

February 6, 2013

Cipla
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Net profit 3QFY2013
2,031 93 1,233 453 339

NEUTRAL
CMP Target Price
% chg qoq
(5.4) (15.3) (9.1) (28.2) (32.2)

`405 -

2QFY2013
2,146 110 1,357 631 500

3QFY2012
1,711 77 996 345 270

% chg yoy
18.7 21.7 23.8 31.3 25.5

Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Pharmaceutical 32,485 (61) 0.5 435/287 191,978 2 19,640 5,959 CIPL.BO CIPLA@IN

Source: Company, Angel Research

For 3QFY2013, Ciplas numbers have come in lower than expected on the bottom-line front, but in-line on the sales front. The net sales and profits for the quarter came in at `2,031cr and `339cr, registering a growth of 18.7% yoy and 25.5% yoy respectively. However, the major positive highlight of the quarter is the improvement in the OPM, which expanded by 215bp yoy to 22.3% (vs 24.9% expected). For FY2014, the Management has given a revenue growth guidance of 15% yoy, while EBITDA margin is expected to be ~22%. We recommend a Neutral rating on the stock. Results lower than expectations: For 3QFY2013, the company reported lower-than-expected numbers on the bottom-line front. The net sales and profits for the quarter came in at `2,031cr and `339cr, registering a growth of 18.7% yoy and 25.5% yoy respectively. On the profitability front, the gross margin and operating profit margin came in much lower than expectations, at 60.7% and 22.3% respectively. Consequently the net profit came in at `339cr, ie lower than expected, mainly on account of the lower-than-expected OPM. Outlook and valuation: For FY2014, the Management has given a revenue growth guidance of around 14% while the EBITDA margin is estimated to be at around 22%. We expect the companys net sales to post a 14.0% CAGR to `9,130cr and EPS to record a 23.2% CAGR to `21.6 over FY201214E. We recommend a Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 36.8 17.8 26.2 19.2

Abs. (%) Sensex Cipla

3m 4.4 2.1

1yr 10.9 14.8

3yr 23.4 30.4

Key financials (Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011
6,130 14.4 990 0.4 12.3 18.6 32.8 15.7 13.1 4.9 5.3 28.6

FY2012
7,021 14.5 1,144 15.6 14.3 23.6 28.4 16.0 17.5 4.3 4.6 19.3

FY2013E
8,151 16.1 1,619 41.5 20.2 25.8 20.1 19.4 20.8 3.6 3.9 15.0

FY2014E
9,130 12.0 1,736 7.3 21.6 24.8 18.7 17.6 19.1 3.1 3.3 13.5

Sarabjit Kour Nangra

+91 22 3935 7600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Cipla | 3QFY2013 Result Update

Exhibit 1: 3QFY2013 ( Standalone) performance

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin Operating profit OPM (%) Interest Depreciation PBT Provision for taxation PAT before extra-ordinary item Extra-ordinary items/(income) PAT after extra-ordinary item EPS (`)
Source: Company, Angel Research

3QFY2013
2,031 93.3 2,124 1233 60.7 453 22.3 9.3 78 459 120 339 0 339 4.2

2QFY2013
2,146 110.1 2,256 1357 63.3 631 29.4 5.4 74 662 162 500 0 500 6.2

% chg qoq
(5.4) (15.3) (5.9) (9.1) (28.2) 73.5 5.5 (30.6) (25.6) (32.2) (32.2)

3QFY2012
1,711 76.7 1,788 996 58.2 345 20.2 3.2 76 343 73 270 0 270 3.4

% chg yoy 9MFY2013 9MFY2012

18.7 21.7 18.8 23.8 31.3 187.0 3.0 33.9 65.4 25.5 25.5 6,094 297.3 6,391 3775 62.0 1583 26.0 15.8 225 1640 400 1240 0 1240 15.4 4,994 227.6 5,221 2898 58.0 1065 21.3 24.4 212 1056 224 832 0 832 10.4

% chg yoy
22.0 30.6 22.4 30.3 48.7 (35.4) 6.2 55.2 78.5 48.9 48.9

Exhibit 2: 3QFY2013 Actual vs Angel estimates

(` cr) Net sales Other income Operating profit Tax Net profit
Source: Company, Angel Research

Actual
2,031 93 453 120 339

Estimates
2,024 113 504 125 404

Variance
0.3 (17.6) (10.2) (4.0) (16.0)

Top-line growth in line of expectations

For 3QFY2013, Cipla reported top-line in line with expectations. The net sales came in at `2,031cr Vs estimates of `2,024cr, registering a growth of 18.7% yoy. The domestic formulation segment grew by 10.2% yoy to `952cr. Overall exports increased by 27.7% yoy to `1,106cr, contributing 47.0% to overall sales. The active pharmaceutical ingredient (API) segment reported a 16.3% yoy growth to end the period at `137cr. Revenue of the formulation exports segment stood at `969cr for the quarter, registering a growth of 38.0% yoy. Technological know-how and other fees stood at `39.8cr (`46.5cr in 3QFY2012), registering a dip of 14.4% yoy.

February 6, 2013

Cipla | 3QFY2013 Result Update

Exhibit 3: Sales trend

1,400 1,200 1,000 869 866 754 1084 970 979 962 1213 1106 957

(` cr)

800 600 400 200 0 3QFY2012

4QFY2012

1QFY2013 2QFY2013 Domestic Export

3QFY2013

Source: Company, Angel Research

Improvement in gross and operating profit

For 3QFY2013, the companys gross margin expanded by 250bp yoy to 60.7%. This along with a lower rise in other expenditure (which grew by 12.4% yoy) aided the OPM to end the quarter at 22.3% (20.2% in 3QFY2012), an expansion of 215bp. This was much lower than the expected OPM of 24.9%, on back of lower than expected expansion in Gross Margins.

Exhibit 4: OPM trend

35 30 25 29.4 22.3 20.2 19.1 22.3

(%)

20 15 10 5 0

3QFY2012

4QFY2012

1QFY2013

2QFY2013

3QFY2013

Source: Company, Angel Research

February 6, 2013

Cipla | 3QFY2013 Result Update

Net profit much below expectations

For 3QFY2013, the companys net profit came in at `339cr, posting a growth of 25.5% yoy. However the net profit was lower than our estimate of `404cr. Net profit growth came in lower than our estimates on the back of lower than expected expansion in the OPM.

Exhibit 5: Net profit trend

550 500 450 400 350 400 339 270 292 500

(` cr)

300 250 200 150 100 50 0

3QFY2012

4QFY2012

1QFY2013

2QFY2013

3QFY2013

Source: Company, Angel Research

Concall takeaways
For FY2014, the company has guided for a revenue growth +14% yoy on sales. EBDITA margin is expected to be around 22% in FY2014. Growth in the domestic market is expected to be around 15% for FY2013. Total MRs is at around 7500. The company filed 5 abbreviated new drug applications (ANDAs) in 9MFY2013. Total approved ANDAs stand at 76 while 23 await approval. The tax rate has been guided at 24%-25% of PBT in FY2013-2014.

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 59% to the total turnover of FY2012, with Africa, US and Latin America constituting more than 60% of total exports. In the US, Cipla has entered into a partnership with more than 22 players and has a strong product pipeline of ANDAs, of which 49 have been launched, while 30 are pending for approval. 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. The Management has also indicated that it is negotiating with MNCs such as Pfizer, GSK and Boehringer for long-term supply agreements.

February 6, 2013

Cipla | 3QFY2013 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%, contributing 41% to the total turnover in FY2012. The company is the market leader in key therapeutic areas such as respiratory care, anti-viral and urological. Ciplas distribution network in India consists of a field force of around 7,500 employees. The company plans to increase its focus on domestic markets with new therapies such as oncology and neuro-psychiatry in the offing. Cipla 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. Valuation: For FY2013, Cipla is expected to post upto 15%+ sales growth, while the bottom-line growth is expected to be higher than that. We expect the company to maintain its OPM at 26% (excluding tech fees) for FY2013. We expect the companys net sales to post a 14.0% CAGR to `9,130cr and EPS to record a 23.2% CAGR to `21.6 over FY201214. The stock is trading at 20.1x and 18.7x FY2013E and FY2014E earnings, respectively. We recommend a Neutral rating on the stock.

Exhibit 6: Key assumptions

Key assumptions Domestic growth (%) Exports growth (%) Growth in employee expenses (%) Operating margins (excl tech. know-how fees) (%)
Source: Company, Angel Research

FY2013E 16.0 20.8 19.0 25.8

FY2014E 16.0 8.7 12.0 24.8

Exhibit 7: One-year forward PE band

600 500 400

(`)

300 200 100 -

Source: Company, Angel Research

February 6, 2013

Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
Price 10x 15x 20x 25x

Cipla | 3QFY2013 Result Update

Exhibit 8: Recommendation Summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Buy Accumulate Accumulate Neutral Neutral Buy Neutral Buy Accumulate Accumulate Neutral Neutral Neutral CMP (`) 76 192 840 405 1,898 105 2,065 61 482 597 436 2,270 747 Tgt. price Upside (`) 95 208 926 145 78 559 655 % PE (x) 25.0 8.3 10.2 38.0 27.9 15.9 9.7 8.0 13.7 18.8 18.7 20.4 7.3 25.1 7.8 12.9 19.0 13.6 25.9 25.7 FY2014E EV/Sales (x) 0.9 1.4 2.6 3.3 2.8 1.1 4.9 0.9 1.9 2.7 1.5 2.8 5.6 EV/EBITDA (x) 5.2 9.2 13.0 13.5 13.4 5.6 15.8 6.0 9.3 12.4 9.4 17.1 13.1 FY12-14E CAGR in EPS (%) 17.1 69.7 18.7 23.2 2.3 26.6 8.7 24.8 30.6 27.2 50.3 2.7 0.1 FY2014E RoCE (%) RoE (%) 29.4 10.7 19.3 19.1 15.1 8.7 38.9 14.6 25.7 24.9 29.7 12.5 27.0 30.2 17.8 26.6 17.6 20.8 11.0 29.0 15.6 26.4 25.2 16.1 14.8 19.1

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

Company Background
Cipla is a leading pharma company in India with a strong presence in both, the export and domestic markets. On the export 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 over 5% market share. Cipla 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 6, 2013

Cipla | 3QFY2013 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA (% of Net Sales) Depreciation & amortisation Interest & other charges Other Income Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 5,022 61.0 4,961 276 5,236 24.2 4,013 2,347 439 271 955 948 19.1 152 33 90 1,129 34.7 233.3 895 124.5 13.9 771 771 1,004 43.3 15.5 9.9 9.9 9.9 5,410 52.2 5,358 265 5,623 7.4 4,292 2,453 445 319 1,075 1,066 19.9 167 23 88 1,230 8.9 (95.0) 1,325 243.5 18.4 1,081 1,081 986 (1.8) 20.2 12.3 12.3 23.8 6,180 49.5 6,130 217 6,347 12.9 4,993 2,747 635 489 1,121 1,138 18.6 254 17 79 1,162 (5.5) 1,162 195.2 16.8 967 22 990 990 0.4 16.1 12.3 12.3 0.4 7,129 108.1 7,021 140 7,160 12.8 5,362 2,739 705 547 1,370 1,659 23.6 312 38 1,448 24.5 1,448 306.5 21.2 1,141 3 1,144 1,144 15.6 16.3 14.3 14.3 15.6 8,188 37.3 8,151 226 8,377 17.0 6,045 3,256 648 651 1,490 2,106 25.8 312 34 144 2,130 47.1 2,130 511.1 24.0 1,619 1,619 1,619 41.5 19.9 20.2 20.2 41.5 9,174 43.2 9,130 240 9,370 11.9 6,863 3,739 725 729 1,670 2,268 24.8 343 34 154 2,284 7.3 2,284 548.2 24.0 1,736 1,736 1,736 7.3 19.0 21.6 21.6 7.3

February 6, 2013

Cipla | 3QFY2013 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Minority interest Total loans Long Term Provisions Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net block Capital work-in-progress Goodwill Investments Long Term Loans and Adv. Current assets Cash Loans & advances Others Current liabilities Net current assets Mis. Exp. not written off Total assets 4,418 53 1,113 3,251 1,405 3,013 5,452 4,367 62 1,226 3,079 1,214 3,153 6,095 80 246 590 402 4,221 96 1,162 2,963 1,175 3,045 7,422 1,269 361 4,130 90 1,464 2,576 1,417 2,713 7,935 1,269 408 5,470 702 1,752 3,016 1,467 4,003 9,368 1,269 457 6,991 1,650 1,963 3,378 1,643 5,348 10,919 2,693 701 1,992 366 2,897 886 2,011 684 4,246 1,147 3,100 285 4,632 1,411 3,221 371 5,040 1,723 3,317 371 5,540 2,066 3,474 371 163.2 5,452 179.2 6,095 155 4,192 4,349 940.2 161 5,750 5,911 5.1 161 6,506 6,667 541.0 0.9 213.1 7,422 161 7,478 7,641 29.2 31.5 233.2 7,935 161 8,910 9,074 29.2 31.5 233.2 9,368 161 10,460 10,624 29.2 31.5 233.2 10,919 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

February 6, 2013

Cipla | 3QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in WC Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 895 152 (583) 65 400 (625) 13 (612) 395 (155) (54) 186 (26) 80 53 FY2010 1,325 167 (131) 256 1,105 (522) (166) (688) 669 (935) (155) 13 (408) 9 53 62 FY2011 1,162 254 (260) 301 856 (950) (344) (1,294) 536 (225) 57 368 (71) 62 96 FY2012 FY2013E FY2014E 1,448 312 327 275 1,812 (472) (678) (1,150) (512) (187) 31 (668) (6) 96 90 2,130 312 (679) 524 1,239 (408) (408) (187) (33) (219) 612 90 702 2,284 343 (397) 582 1,648 (500) (500) (187) (14) (200) 948 702 1,650

February 6, 2013

Cipla | 3QFY2013 Result Update

Key Ratio
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Int. Coverage (EBIT / Int.) 0.2 0.9 24.2 (0.01) (0.1) 39.2 0.1 0.4 (0.0) (0.0) (0.1) (0.3) (0.2) (0.7) 2.1 88 114 45 186 2.0 94 111 54 196 1.8 98 88 59 174 1.6 102 81 57 142 1.7 101 81 55 129 1.8 49 40 26 136 16.1 17.4 24.8 15.6 17.3 19.2 13.1 14.3 15.7 17.5 18.6 16.0 20.7 22.8 19.4 19.0 22.4 17.6 16.1 86.1 1.1 14.8 3.8 0.2 16.6 16.8 81.6 1.0 13.5 4.0 0.1 14.4 14.4 83.2 1.0 11.4 5.3 0.0 11.6 19.2 78.8 0.9 14.3 10.6 0.0 14.4 22.0 76.0 1.0 17.0 89.4 (0.0) 20.0 21.1 76.0 1.0 16.7 89.4 0.0 16.7 9.9 9.9 11.9 2.0 55.9 12.3 12.3 15.5 2.0 73.6 12.3 12.3 15.5 2.8 83.0 14.3 14.3 18.1 3.0 95.2 20.2 20.2 24.0 4.0 113.0 21.6 21.6 25.9 4.3 132.3 40.8 34.1 7.2 0.5 6.5 34.1 5.9 32.9 26.0 5.5 0.5 6.1 30.4 5.3 32.8 26.1 4.9 0.7 5.3 28.6 4.4 28.4 22.3 4.3 0.7 4.6 19.3 4.0 20.1 16.8 3.6 1.0 3.9 14.9 3.4 18.7 15.6 3.1 1.1 3.3 13.4 2.8 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

February 6, 2013

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Cipla | 3QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Cipla No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 6, 2013

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