Cipla Limited: Company Report

August 24, 2000
Mumbai
ICICI Securities and Finance Company Ltd.

Equity Research
Shilpa Gupta (91-22) 2882460/70 (Extn.:7134)
(shilpa_gupta@isecltd.com)
Securities
Company Report
Cipla Limited
A quiver full of arrows
BUY
(Rs790)
The Pharmaceutical Equity
Research group published the
following reports:
Cipla Limited
(September 23, 1999)
Dr. Reddy's Laboratories
(September 20, 1999)
Hoechst Marion Roussel
(September 6, 1999)
Ranbaxy Laboratories Limited
(August 29, 1999)
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Cipla is the second largest company in domestic formulations with a 4.5% market share.
Over the last six years, Ciplas domestic sales and exports have grown at 18.2% and
34.7% CAGR respectively. Strong R&D drives Ciplas high growth in domestic and
export sales. Strengths in process R&D have enabled Cipla to launch new products at a
fast pace. Increased focus on Novel Drug Delivery Systems (NDDS) and chiral chemistry
offers a significant upside. Ciplas strong domestic presence, strategy of overseas
alliances and a rich pipeline of new products will position it as a significant player in the
post-GATT era. All these factors, we believe, make Cipla a compelling BUY.
Leader in domestic market: Ciplas domestic formulations have grown at 18.2% CAGR
over the last six years, significantly higher than the industry growth of 13%. This growth can
be attributed to a large number of new product launches (over 20 every year), strong portfolio
of brands and a very strong marketing field force. Ciplas product mix is getting richer with a
shift towards high value added, fast growing therapeutic segments like anti-asthma, antiAIDS and anti-cancer. Going forward, we believe that this will lead to increased margins.
Cipla is strongly positioned to maintain its leadership in the coming years.
Increased focus on exports: Though Cipla has been a late entrant in exports, over the last six
years, the focus on exports has increased substantially. Contribution of exports to revenues
has gone up from 9.9% in FY1994 to 19% in FY2000 and is expected to further go up to
30.6% in FY2003 (CAGR of 43% from FY2000 to FY2003). Since, margins on exports are
substantially higher than on domestic sales, higher contribution from exports would lead to
significant margin expansion.
Continuous new products from R&D: Cipla has a strong process R&D and is focusing
increasingly on chiral chemistry and NDDS. Chiral chemistry and NDDS offer significant
upside since the company can license these research products to an MNC. Chiral chemistry
has additional potential since the improved products are eligible for approval as New
Chemical Entities (NCEs). We believe that Cipla will have a rich pipeline of new products
in post-GATT era due to its strong R&D capabilities.
Strong fundamentals and earnings growth: Cipla has a high ROCE of 28.6% in FY2000,
which is expected to go up to 31.6% in FY2003. The earnings of the company are expected to
grow at a CAGR of 28.3% over the next three years driven by revenue growth of 22.1%
CAGR and operating margins expansion from 21.2% in FY2000 to 24.7% in FY2003. Our
18-month target price is Rs1,335, which discounts FY2003 earnings by 30x. BUY
Cipla Limited* (CIPL.BO, CIPL.NS)

Y/E Mar
EPS
P/E
CFPS P/CFPS
Price (23/08/2000)
790 1999A
19.2
41.1
21.4
36.9 Index
4461
52-Wk Range (H/L) Rs1722 / 649 2000A
21.1
37.4
23.3
33.9 Market Cap. Rs 47,376 mn
Dividend (Rs)
5.5 2001E
26.8
29.5
29.3
27.0 Shares Out.
59.97 mn
Yield (%)
0.7 2002E
34.1
23.1
37.3
21.2
*The common stock is traded on Indian stock exchanges and can be purchased only by those foreign investors
registered as Foreign Institutional Investors (FIIs) with the Securities Exchange Board of India (SEBI). Foreign
portfolio investments are restricted to a maximum of 40%.
No part of this research report may be reproduced or sent into the United States, Canada, or Japan or to any US persons, by any means whatsoever. Failure to comply with this
restriction may constitute a violation of United States, Canadian, or Japanese Securities laws.
This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or solicitation or
an offer to buy or sell the securities mentioned. Please refer to the notes at the end of this report.
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
TABLE OF CONTENTS
Investment Thesis......................................................................................................................3
Earnings Outlook.......................................................................................................................5
Research and Development .......................................................................................................9
Valuation .................................................................................................................................11
Management and Background.................................................................................................14
TABLES
Table 1: Earnings statement ......................................................................................................5
Table 2: Revenue projections ....................................................................................................5
Table 3: Top Cipla products ......................................................................................................6
Table 4: On the basis of strong R&D, Cipla was the first to introduce these drugs in India .....7
Table 5: Cipla export thrust led by joint ventures and marketing tie-ups ................................8
Table 6: Peer comparison ........................................................................................................13
Table 7: Capital history ...........................................................................................................14
Table 8: Profit and Loss statement ..........................................................................................16
Table 9: Quarterly results (Q1FY2001) ..................................................................................16
Table 10: Balance sheet...........................................................................................................17
Table 11: Cash flow statement ................................................................................................17
Table 12: Key financial ratios .................................................................................................18
CHARTS
Chart 1: Change in product mix with shift towards high margin, high growth businesses .......6
Chart 2: PE Band.....................................................................................................................11
Chart 3: Price performance Relative to Sensex and i-SEC Indian Pharma Index ...................13
Chart 4: PE vs. Earnings growth for pharmaceutical sector ....................................................13
Chart 5: Shareholding pattern..................................................................................................14
Chart 6: Trend in PBT, PAT & Accretion to reserves .........................................................15
Chart 7: Op. Income, Op. Profit and EBIDTA trend
.........................................................15
Chart 8: Trend in EPS ........................................................................................................15
Chart 9: Trend in ROCE and RONW......................................................................................15
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
INVESTMENT THESIS
Positives
Strength in domestic marketing
Cipla is the second largest pharmaceutical company in domestic formulations with a market
share of 4.5%. In domestic formulations, Cipla has seventeen brands in the top 250 brands
(Ciplox, largest selling brand of Cipla ranks eighth), with a strong presence in anti-asthmatic
and antibiotic drugs. Cipla enjoys good brand equity and reputation in the medical fraternity.
The company has the highest Medical Sales Representative (MSR) productivity and its sales
force of 900 is perceived to be amongst the best in the industry.
Cipla has launched products in the Indian market at a pace unmatched by most competitors. It
has been launching over 20 brands every year. Products launched in the last ten years
contribute 80% to sales while those launched in the last three years contribute 25%. Ciplas
strategy is to identify successful new drug launches in the western markets, which fit the
disease pattern in India. Its strong reverse engineering capabilities ensure speed in marketing,
placing it among the first to launch a product in India. In addition to introducing new drugs,
Cipla has gained market share by going for line extensions and introducing value-added
products like sophisticated drug delivery systems.
The product mix is getting richer with a shift towards high value added, fast growing
therapeutic segments like anti-asthma, anti-AIDS, anti-cancer and cardiovasculars. The
contribution of anti-infectives, a very competitive segment, has declined from 51% in
FY1994 to 39% in FY1999 and is estimated to come down further. We believe that this will
lead to increased margins in the coming years.
Focus on high margin exports
Ciplas focus on exports has increased in the last six years. Exports have grown at a CAGR of
34.7% from FY1994 to FY2000 and their contribution has gone up from 9.9% in FY1994 to
19% in FY2000 and is expected to go up to 30.6% in FY2003. Ciplas exports are expected to
grow at 43.0% CAGR from FY2000 to FY2003.
Formulations contribute to 55-60% of the companys exports. Cipla aims at those products,
which are off patent, complicated to manufacture and have limited competition. Cipla has
exited the Russian market and consolidated its presence in other markets like US, Europe and
Africa. Europe and US contribute 57% of total exports. We expect this to increase, going
forward. As the operating margins in exports are estimated to be almost double that of the
domestic market, increased contribution of exports to revenues would lead to higher margins.
Cipla has marketing alliances for tapping overseas markets and has not made any
investments. We believe that this is a low risk sustainable strategy with possibility of high
returns. These marketing alliances combine the manufacturing expertise of Cipla with the
local marketing expertise of the partner. This strategy requires lesser management time and
energy, besides giving fast access to the overseas market.
Strong research capabilities
Over the last six years, Cipla has spent Rs1,100mn on R&D (compared with Rs1,036mn
spent by DRL). Apart from reverse engineering, Cipla has also been focussing on New Drug
Delivery Systems and chiral synthesis. Some of its recent successes are Lamivudine (AntiAIDS, chiral version), Nevimune (anti-AIDS), CFC-free inhalers (HFA-based and
Budesonide-based), R Salbutamol (chiral version of Salbutamol), Rotahaler (NDDS) and
Zerostat (NDDS). Currently Cipla is working on biological studies for Omeprazole NDDS,
Cyclosporin NDDS, hormone replacement therapy (HRT) and a non-infringing product for an
HFA-based inhaler.
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Though Cipla has made forays into basic research, it is focussing more on improvement in
known chemical entities, mostly blockbuster drugs. In addition to strong process capabilities,
Cipla has also developed core competence in developing ICEs (improved chemical entities) in
either chiral version or NDDS. There is significant upside from this, as the ICEs can be
patented and licensed out to the original patent holder or to a generics company. In addition,
compared with an NCE, development time, costs, gestation period and risks involved for
developing ICEs are much lesser.
Ciplas strength in R&D is borne out by an impressive record of new product launches. It has
plans to launch 15 new formulations, 15 brand extensions and 10 new bulk drugs every year.
We believe that strong research capabilities leading to a rich product pipeline will sustain
Ciplas growth in the post-GATT era.
Ready for post GATT era
We feel that with a strong position in the domestic market, R&D capabilities and alliances in
the overseas market, Cipla is geared to meet post-GATT challenges. Due to its strong
presence in the domestic market, Cipla seems to be ideally positioned to emerge as a licensing
base for MNCs, which do not have a significant presence in India. In the post-GATT era,
Cipla, with a powerful research orientation, will continue to launch new products. In the
overseas markets, the company will benefit from marketing alliances.
Strong financials and earnings growth
Cipla is almost a debt-free company with a high ROCE and RONW of 28.6% and 22.0%
respectively in FY2000. The company is expected to maintain the same levels of ROCE and
RONW in the next three years. Cipla has tight control over its working capital. Number of
debtor days, at 39, is amongst the lowest in the industry, indicative of Ciplas quality of sales
and leadership. The OPM of the company is expected to go up from 21.2% in FY2000 to
24.7% in FY2003. The earnings of the company are expected to grow at a CAGR of 28.3%
over the next three years.
Risks
Uncertainty surrounding succession
The top management of the company is led by Dr.Y.K. Hamied, the Chairman & Managing
Director of the company. Dr. Hamied has a very strong technical background and is
considered to be a visionary. He is highly respected in the pharmaceutical industry. Although
he is assisted by a team of qualified professionals, there is no clear successor designated to
assume management control. In addition, a number of unconfirmed reports in the financial
press regarding take over attempts have made succession a key issue for investors. In our
opinion, Cipla has a strong professional team and though the succession issue remains, we are
confident of the companys ability to maintain its strong performance. Also, a take-over by a
multinational company could only improve valuations, from the investors perspective.
Only organic growth
Cipla is not inclined to acquisitions and plans to grow organically. This might result in the
company losing out on some good acquisition opportunities and could bring down market
share. According to the management, brand (or company) acquisitions are not lucrative, as
valuations are very steep. Instead, Cipla believes in creating and building its own brands.
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
EARNINGS OUTLOOK
We estimate earnings to grow at a CAGR of 28.3% over the next three years. This would be
driven by revenue growth at 22.1% CAGR and operating profits margin expansion from
21.2% in FY2000 to 24.7% in FY2003. The increase in operating profit margin will come
from increased percentage of exports, change in mix towards more profitable and high growth
segments (lesser contribution from anti-infectives) and higher economies of scale.
Table 1: Earnings statement
(Rs million, year ending March 31)
1998
1999
2000
2001
2002
2003
Net sales
Other related income
Total operating Income
Less:
Raw materials incl Inventory adjust
Power and fuel
Manpower
SGA
Other expenses
Total expenses
4,829
8
4,837
5,701
27
5,728
6,925
28
6,953
8,307
40
8,347
10,153
45
10,198
12,621
50
12,671
CAGR %
2000-2003
22.1
21.3
22.1
2,409
76
225
872
52
3,634
2,790
93
291
1,030
68
4,273
3,554
107
349
1,363
106
5,479
4,245
125
415
1,578
116
6,480
5,158
142
487
1,878
122
7,787
6,374
177
593
2,272
126
9,542
21.5
18.3
19.3
18.6
5.9
20.3
Operating profit
Add: Other income
1,203
157
1,456
253
1,474
329
1,868
423
2,411
496
3,130
644
28.5
25.0
EBIDTA
Depreciation
EBIT
Gross interest
1,360
(87)
1,273
24
1,708
(135)
1,573
29
1,804
(133)
1,670
11
2,290
(151)
2,140
18
2,907
(190)
2,716
12
3,773
(235)
3,538
9
27.9
20.8
28.4
-7.6
PBT
Less: Adjusted tax
PAT (Adj.)
Add: Extra Ordinary income net of tax
PAT (Reported)
Source: Company data, i-SEC estimates
1,249
305
944
76
1,020
1,545
395
1,150
1,659
396
1,263
68
1,331
2,122
513
1,608
2,704
657
2,047
3,529
861
2,668
28.6
29.6
28.3
1,608
2,047
2,668
26.1
1,150
Revenue projections
Ciplas revenue growth will be driven by domestic sales growth of 15.7% CAGR over the
next three years and export growth of 43.0% CAGR. The percentage of exports to total
revenues is expected to go up from 19% in FY2000 to 30.6% in FY2003.
Table 2: Revenue projections
Gross sales
Domestic
Formulation
Bulk drugs
Generics
Exports
Formulation
Bulk drugs
Source: Company data and i-SEC estimates
2000
7,590
6,150
5,500
50
600
1,440
792
648
2001
9,079
7,135
6,270
55
810
1,944
1,069
875
2002
11,072
8,243
7,211
61
972
2,829
1,604
1,225
2003
13,734
9,525
8,292
67
1,166
4,209
2,494
1,715
CAGR %
21.9
15.7
14.7
10.0
24.8
43.0
46.6
38.3
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Domestic pharmaceutical formulations

Cipla is one of the pioneering Indian pharmaceutical companies, which has performed
exceedingly well in the last decade. Ciplas growth has been across a wide therapeutic
spectrum. Cipla has been a pioneer in introduction of new drugs in the domestic market and
launched anti-asthmatic and anti-cancer drugs in early eighties. We expect domestic
formulations business to grow at 14.7% CAGR over the next three years. Cipla has very
strong brands. Seventeen of its brands feature among the top 250 domestic formulations
(Ciplox, Cipla largest selling brand, ranks eighth in domestic formulations)
Table 3: Top Cipla products
(April June 2000)
Norflox
Ciplox
Asthalin-INH
Novamox
Aerocort
Novaclox
Norflox-TZ
Ciplox-TZ
Amlopres-AT
Asthalin
Restyl
Trivedon-20
Cefadur
Theo Asthalin
Total sales
Source: ORG
Quinolones
Quinolones
Bronchodilators, Others
Ampicillin/Amoxycillin
Ampicillin/Amoxycillin
Intest.Antiinf.-NOR.+
Intest.Antiinf.-CIP.+
Hypotensive Comb.
Ataractics
Other Coronary Vasodil
Cephalosporins
Value
(Rs mn)
99.0
97.0
62.0
52.0
51.0
51.0
41.0
39.0
36.0
32.0
30.0
28.0
28.0
27.0
1,572.0
MS
(%)
7.1
7.0
9.1
3.4
7.5
3.4
30.5
13.8
13.8
4.7
5.3
26.7
1.5
4.0
4.5
Contribution
(%)
6.3
6.2
4.0
3.3
3.3
3.3
2.7
2.5
2.3
2.1
1.9
1.8
1.8
1.8
100
Gr.(%)
(YoY)
-9.4
-12.7
35.1
-0.2
19.9
16.1
-0.7
8.6
32.4
4.7
3.9
26.4
9.7
-1.7
18.1
There has been a change in the therapeutic profile of domestic formulations with dependence
on anti-infectives coming down. We expect anti-asthmatic, cardiovascular, anti-cancer and
anti-AIDS drugs to form a larger proportion of sales in the next three years.
Chart 1: Change in product mix with shift towards high margin, high growth businesses
1996
Others
20%
Anti-cancers
2%
Anthelmintics
5%
Cardiovasculars
5%
Antiinflammatories
Anti-asthmatics
7%
13%
1999
Others
23%
Antibiotics
48%
Antibiotics
39%
Anti-cancers
4%
Anthelmintics
3%
Cardiovasculars
7%
Antiinflammatories
7%
Anti-asthmatics
17%
Source: Company data
New product launches

Cipla has a distinct edge over competitors, having regularly introduced several new drugs in
the domestic market at affordable rates. Cipla has been launching over 20 products every year
and has established strong brands. Products launched in the last ten years contribute 80%
to sales while those launched in the last three years contribute 25%. The launch of new
products can be attributed to the extensive research undertaken by Cipla. On an average, it
spends 4% of its operating income annually on R&D, which is over twice the industry
average of 1.8%.
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Table 4: On the basis of strong R&D, Cipla was the first to introduce these drugs in India
Clofibrate For hyperlipidaemias resistant to diet
Propranolol - For hypertension
Lorazepam - For anxiety
Salbutamol sulphate For bronchial asthma
Vincristine sulphate For acute leukaemia
Vinblastine sulphate For palliative treatment of
cancer
Piroxicam For rheumatoid arthritis
Gugulipid For cholesterol
Norfloxacin - Broad spectrum antibacterial
Lamivudine - For HIV Infection
Etoposide For various cancers

Zidovudine (AZT) - For HIV infection
Ondansetron - For cancer-induced emesis
Salmeterol For bronchial asthma
Deferiprone - Worlds first oral iron chelator for use in
thalassaemia
Finasteride For benign prostatic hyperplasia
Fluticasone propionate Topical corticosteroid
Alendronate - For osteoporosis
Stavudine For HIV Infection.
Marketing set up
Ciplas MSR team of 900 is reputed to be amongst the best in the industry. Cipla has the
highest field force productivity in domestic formulations with Rs6.2mn sales/MSR (second
highest is Novartis with Rs6.0mn sales/MSR; DRL has Rs4.2mn sales/MSR). Besides
periodically visiting doctors, the product executives undertake prescription research, market
surveys, analysis of product trends, positioning, track competition and development of
product strategies. As a direct result of the marketing focus Ciplas products enjoy a strong
brand equity and reputation in the medical fraternity.
Unbranded generics
Ciplas turnover from generic generics in FY2000 was Rs600mn, 9.8% of domestic revenue.
In unbranded generics, Ciplas strategy is to generate revenues with minimal incremental
resource allotment. We expect this segment to grow at 24.8% CAGR over the next three
years. In this segment, Cipla would be focussing on low end, low technology products and in
categories where it does not have a strong presence in branded formulations. Though margins
in this business are low, volumes can be generated as Cipla makes these sales to hospitals,
institutions or generic companies, which will market the product. Most of these sales are
based on cash across the counter and do not involve investment in working capital. Cipla
does not incur marketing expenses for these products. We feel that this strategy helps Cipla in
maintaining a bottomline growth, insulating it from a slowdown in domestic formulation
growth.
Exports will drive growth and margins
Cipla has been a late entrant in exports despite being one of the first Indian companies to
receive FDA approval for its manufacturing facilities. However, Cipla has increased its export
thrust over the last six years. Cipla aims to be a significant player in the international generics
markets. It is likely to continue in those drugs, which are off patent, complicated to
manufacture and have limited competition. Cipla has been developing leading edge bulk
drugs in anti-AIDS, anti-cancer and Cox-2 inhibitor segments. Cipla also offers technology
for products and processes. Ciplas earnings in Q1FY2001 from technology transfers were
Rs20mn. Ciplas manufacturing facilities have approval from the following regulatory
authorities.
Food and Drug Administration (FDA), USA
Medicines Control Agency (MCA), UK
Therapeutic Goods Administration (TGA), Australia
Medicines Control Council (MCC), South Africa
National Institute of Pharmacy (NIP), Hungary
Pharmaceutical Inspection Convention (PIC), Germany
World Health Organisation (WHO)
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Cipla exports a higher percentage of formulations (55-60% of total exports) compared with
preponderance of bulk drugs in exports by other domestic pharmaceutical companies. A
better product mix results in significantly higher export margins. An unstable economic
situation in Russia prompted the company to exit the Russian markets (Russia contributed
21% to exports in FY1997) and consolidate its presence in other markets. Over the last three
years, Ciplas geographical mix has moved towards more profitable markets like Europe and
US. The percentage of exports to US has gone up from 9% in FY1997 to 32% in FY2000.
Europe and US combined contribute 57% to total exports. In the coming years, Cipla will
benefit from export of CFC-free inhalers to European countries. It will capitalise on export
opportunities for anti-AIDS products in South Africa, Thailand and other countries and focus
on exports to US generics markets (working on 8 ANDAs).
Export opportunities from CFC-free inhalers and anti-AIDS markets: Cipla is one of the
few companies in the world and first company outside US and Europe, to develop a CFC-free
inhaler. The European market is estimated at 1bn and Cipla is targeting a 3%-6% market
share here. At a conservative estimate of 2% market share, this would result in additional
export revenues of Rs1,360mn. Cipla has already started product registrations in nonregulated markets and is also working on a non-infringing model which is likely to come out
in a years time. Cipla plans to invest Rs500mn over the next three years for manufacture of
CFC-free inhalers. Commercial production for this is expected to commence in mid-2001 and
will likely reflect on Ciplas earnings from FY2002 onwards. Cipla has a wide range of
products in anti-AIDS and offers cocktail therapies (combination of three drugs). Cipla is
already selling its anti-AIDS products in Latin America and Central Africa and is now
targeting South Africa, Thailand and other non-regulated markets in a big way. Cipla plans to
sell these drugs at one-fifth to one-tenth the prices charged by patent holders. We believe that
anti-asthmatic and anti-AIDS products would boost the companys exports significantly.
Upside from US generics market: Cipla is working on filing eight abbreviated new drug
applications (ANDAs). The company has already entered into a product specific marketing
alliance with Zenith Goldline (US) for marketing Flutamide formulate in US. It is likely to
enter into more such product specific marketing alliances with US generic players. We
believe that in the next two to three years, Cipla will gain substantially from its alliances in
US. Cipla is planning to undertake a capex of Rs500mn over the next three years for US
generics market.
We expect Ciplas exports to grow at 43.0% CAGR of over the next three years and
contribution of exports to revenues to go up from 19% in FY2000 to 30.6% in FY2003.
Cipla has marketing alliances for tapping overseas markets and has not made investments
here. These marketing alliances combine Ciplas manufacturing expertise with local
marketing ability of the partner. Cipla is likely to enter into more marketing alliances in the
coming years. We believe that these marketing alliances will provide a platform of growth for
Ciplas exports in the coming years.
Table 5: Ciplas export thrust led by joint ventures and marketing tie-ups
Alliance partner
Zenith Goldline
Neolab, UK
Chanelle Pharmaceuticals,
Ireland
Medpro, South Africa
Genpharm, Australia
Helio Pharamceuticals,
Egypt
NovoPharm, Canada
Purpose
Marketing Flutamide based product
For marketing of range of generic products in selected
European markets.
For marketing a range of human and veterinary drug
formulations in Europe
Marketing of inhalers, nasal dosage forms, cardiac drugs and
anti-biotics
Marketing of formulations focussing on antibiotics, antiinfectives, anti- ulcerants and cardiac drugs
Has registered a number of products including cardiac, antiasthmatics, opthamological, anti cancer and immunosuppressants
Marketing of formulations (including the entire medicinal
aerosol range
Markets
US
Select European
countries
Europe
South Africa and
Central Africa
Australia
Egypt
US and Canada
Source: Company
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
RESEARCH AND DEVELOPMENT

Strong R&D has driven Ciplas high growth in domestic and export sales. Cipla spends 4% of
its sales revenue on R&D, which is significantly higher than the industry average. Over the
last six years, Cipla spent Rs1,100mn on R&D (compared with Rs1,036mn spent by DRL).
Cipla has over 200 scientists and has R&D facilities at Mumbai Central, Vikroli, Patalganga,
Bangalore and Kurkumbh. It is planning to undertake a capex of Rs200mn-Rs300mn over the
next three years on R&D. This reflects on the companys increased focus on R&D.
Cipla has strong process re-engineering capabilities, which give it cost advantage and
enhance speed of product launches. While Cipla is working on basic research as well
(development of NCEs), its focus is more on development of ICEs (Improvement Chemical
Entities), its core strength.
R&D - fired by ICE

ICEs are the improved chemical entities, designed to offer better patient outcome through
reduced side effects, increased therapeutic efficacy, or improved dosage forms. Chiral
synthesis (single isomer versions of existing racemates) and NDDS form the development
focus of ICE pharmaceuticals. In some cases, the ICE pharmaceuticals may provide an
opportunity for additional therapeutic benefits.
Cipla is working on developing and commercialising potentially improved versions of widely
prescribed drugs. Since Cipla develops already proven drugs, the inherent risk of failure in
ICE is quite low and the clinical period is shortened compared with NCEs. Ciplas focus in
ICE is on fertility hormones, anti-ulcer, asthma, cardiac care, oncology and anti-AIDS.
Chiral synthesis
Over 500 drugs are currently marketed as racemates. By definition a racemate is a 1:1 mixture
of two isomers. Isomers are molecules that are non-superimposable mirror images of one
another, much like right and left hands. In fact racemic drugs derive the name chiral drugs,
from Greek, meaning "handedness". The two isomers are termed R and S (sinister).
While isomers have identical molecular weights and near-identical physical properties, they
show remarkable selectivity within biological systems and therefore can have different
biological actions. In many cases, only one isomer of the racemic drug is responsible for the
drug's efficacy. The other may be an unnecessary component and may cause undesirable or
severe side effects.
Ciplas major scientific and medical research is currently focused on discovering unique
differences between isomers derived from racemates. Cipla applies state-of-the-art technology
to achieve comparative evaluation of isomers in a highly focused manner. This kind of
research effort allows for decisive identification of advantages such as improvements in
potency, onset of action, duration of activity or most important, meaningful reductions in side
effects or adverse reactions. By applying contemporary chiral technology to separate and
purify racemic mixtures or to synthesise only the desired isomer directly, Cipla aims to
eliminate unwanted isomers and, when possible, develop only the form, which carries the
therapeutic benefit.
Cipla had started working on chiral synthesis about eight years ago, a reflection on the
managements astuteness and foresight. Cipla has successfully developed R Salbutamol, the
chiral version of Salbutamol, in a more resolved and active form. The new form of the antiasthma drug can be administered in far smaller dosages (one-fourth of the current one) and
does not have side effects like tremors. Cipla has also successfully developed chiral version
of the anti-AIDS drug, Lamivudine. We believe that Ciplas pipeline of chiral drugs offers
tremendous opportunities. Chiral synthesis products (single isomers) can be patented as
NCEs.
10
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
New drug delivery systems (NDDS)

In NDDS, Cipla has obtained patents for the transparent dry powder inhalation device,
Rotahaler, as well as small spacer device, Zerostat. The company has got patents for these
two products in South Africa and has also filed for patents in Europe. Cipla is currently
working on NDDS of Omeprazole and Cyclosporin.
Omeprazole has estimated annual sales of US$6.8bn and is going off patent in April 2001.
Cipla has already filed Drug Master File (DMF) for the bulk drug and is the first company to
do so. It has also filed patent for Omeprazole NDDS. The bioequivalence studies on NDDS
are almost over. We expect Cipla to license the NDDS either to the original patent holder or
to a genrics company. This would result in a significant increase in revenues for the company
in form of milestone payments/ technical fees / bulk drug sales.
The estimated market for Cyclosporin is US$1bn. Cyclosporin is used in organ transplants
and is a very complex molecule. Cipla has patented the NDDS for Cyclosporin using a
macro-emulsion technology, which is different from that of Novartis, the original patent
holder. The company is currently conducting bioequivalence studies for its NDDS. Because
of the complex nature of the molecule, competition for the product is likely to be limited and
the price collapse would not be much as the product comes out of patent.
11
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
VALUATION
At Rs790, Cipla trades at 29.5x FY2001 and 23.1x FY2002 earnings estimate. Cipla is trading
at a discount to both domestic (11.6% discount to DRL, 6.4% discount to Ranbaxy) and MNC
(24.7% discount to Glaxo, 24.6% discount to Pfizer) companies. Cipla has high ROCE and
RONW of 28.6% and 22.0% respectively and a net earnings CAGR of 28.3% over the next
three years. The OPM of the company is expected to go up from 21.2% in FY2001 to 24.7%
in FY2003. Despite a higher level of capex of Rs2,400 to be undertaken by the company over
the next three years, ROCE of the company is estimated to increase from 28.6 % in FY2000
to 31.6% in FY2003. The projects on which Cipla is working offer tremendous global
opportunities. Considering these factors, we believe that current valuations do not adequately
reflect the intrinsic worth of the company.
We expect Cipla to trade in a valuation band of 30-35x one-year forward earnings. We set a
conservative 18-month price target of Rs1,335 by March 2002, based on a valuation multiple
of 30x. We expect Ciplas valuations to be driven by new product launches in domestic
market, huge potential of exports of CFC-free inhalers to Europe, export opportunities in
AIDS market and progress in chiral and NDDS research.
Chart 2: PE Band
400000
Volume (LHS)
2000
Cipla Ltd (RHS)
1800
350000
1600
300000
1400
250000
1200
200000
1000
150000
800
600
100000
400
50000
0
Aug-98
200
0
Dec-98
Apr-99
Aug-99
Dec-99
Apr-00
Aug-00
Source: CMIE, Company data
Share price performance

Cipla has outperformed both the Sensex and i-SEC Indian Pharmaceuticals Index over the last
40 months. The outperformance has been driven by strong fundamentals of the company,
sustained earnings growth, resolution of controversy regarding the rights and its successful
chiral and NDDS research.
The share price rose sharply from February 1999 onwards and peaked at Rs1,722 on October
20, 1999, two months after the company announced a bonus of 2:1. Since then the stock has
come down 54.1% from its peak. We believe it is a good time to buy Cipla, considering the
companys strong earnings growth and fundamentals.
12
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
News that led to Ciplas stock price increase (between Feb 1999 and Oct 1999) and re-rating
February 1999
Cipla files international patents for an Omeprazole formulation
The company is working on chiral synthesis for development of molecules to take on the
challenge of product patent regime
Cipla cuts price of anti-AIDS drugs by 25% with which the price differential between its
product Zidovir and Glaxos anti-AIDS brands widened by over 200%. Cipla and Glaxo
are the only two companies in India manufacturing anti-AIDS formulations
Cipla gets into marketing alliance with UK firm Neolab for marketing a range of generic
drugs in major European markets. This alliance will improve Ciplas access to the multibillion dollar European markets for off-patent drugs and also result in royalty payments
on sale of products under the deal
Cipla and Ranbaxy enter into strategic tie-up to market a select basket of drugs jointly.
Cipla exports inputs for Viagra. While four pharmaceutical companies in India got
approval for exports of the bulk drug, Sildenafil citrate, only Cipla exported the drug in
significant quantities.
March 1999
Cipla is in talks with a few US based generic companies for alliances to market its
product. Till now it is exporting only bulk drugs to US. Talks with a US generics
company to include areas of technology transfers from Cipla to these companies in
exchange for royalty and exports. Cipla is also planning to file 8-11 ANDAs.
June 1999
Cipla launches anti-AIDS drug, Lamivir at 60% discount to Glaxos price.
Cipla working on filing of ANDAs with international generics firms for a range of
products
Good quarterly results with 24% sales growth (exports growth of 105% and domestics
sales growth of 17%) and 29% profit growth. Announces proposed launch of CFC-free
aerosols in the domestic market.
August 1999
Cipla plans to invest $15mn in facilities to cater to the US market. Company is filing
eight ANDAs to market drugs in US markets for asthma, cardiac problems and infection
Cipla announces bonus issue in the ratio of 2:1
September 1999
Cipla in trials with a resolved, improved form of anti-asthma drug, Salbutamol.
Cipla signs a supply-cum-marketing agreement with Zenith Goldline of the US for anticancer product, Cytomid.
Dr. Hamied states that the CFC-free inhaler and anti-asthmatic devices like Rotahaler and
Zerostat have been patented internationally.
Cipla announces launch of its first chirally resolved molecule, asthma drug R
Salbutamol, in four months time. This new drug is about four times as effective as the
current Salbutamol
13
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Chart 3: Price performance Relative to Sensex and i-SEC Indian Pharma Index
700
Cipla
Indian Pharma Index
Sensex
600
500
400
300
200
100
0
Aug-98
Dec-98
Apr-99
Aug-99
Dec-99
Apr-00
Aug-00
Source: CMIE, i-SEC estimates
P/E vs. Earnings growth comparison

Ciplas valuations compare well with Ranbaxy and DRL, the other two domestic
pharmaceuticals majors. We therefore, do not expect significant downside from current
valuations.
Table 6: Peer comparison
Price EPS 2000 EPS 2001 EPS 2002
(Rs)
Year 0
Year 1
Year 2
Glaxo India
457
8.5
11.7
14.0
Burroughs Wellcome
332
26.9
34.1
38.5
Novartis India
887
32.4
37.9
42.9
Cipla
790
21.1
26.8
34.1
Ranbaxy
618
17.4
19.6
22.2
Pfizer Ltd.
590
15.2
15.1
19.8
SmithKline Pharma
163
8.5
9.1
9.9
Dr. Reddys Lab.
1,213
28.0
36.4
48.1
Source: Company data, i-SEC estimates and Consensus estimates
EPS CAGR
%
28.3
19.7
15.0
27.1
13.2
14.2
8.2
31.0
P/E 2000 P/E 2001 P/E 2002

Year 0
Year 1
Year 2
53.8
39.1
32.6
12.3
9.7
8.6
27.4
23.4
20.7
35.9
29.9
23.9
35.5
31.5
27.8
38.8
39.1
29.8
19.2
17.9
16.5
43.3
33.3
25.2
Chart 4: PE vs. Earnings growth for pharmaceutical sector

45
40
Pfizer Ltd
Glaxo India
35
P/E 2001
Dr. Reddy
Ranbaxy
30
25
Cipla
Novartis India
20
SmithKline Pharma
15
Burroughs
Wellcome
10
5
0
0
10
15
20
EPS CAGR %
25
30
35
Source: i-SEC estimates, Consensus estimates

14
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
MANAGEMENT AND BACKGROUND

Late Dr.K.A.Hamied founded Cipla in 1935. At present, a Board of Directors, headed by
Dr.Yusuf K.Hamied, Chairman and Managing Director, oversees the companys operations.
Dr. Yusuf K. Hamied is a highly qualified and eminent chemist. Ciplas strong process
research capabilities are attributed to his technical guidance and Research & Development
work. Dr. Hamied is assisted by three wholetime Directors and a team of qualified technical
and managerial professionals.
Table 7: Capital history
Issue month
Issue type
Security type
May 1991
Oct 1992
Apr 1994
Jul 1994
Apr 1995
Oct 1999
Source: CMIE
Conv. Pref.
Bonus
Bonus
Stock split
Bonus
Bonus
Equity
Equity
Equity
Equity
Equity
Equity
Face value
(Rs.)
100
100
100
10
10
10
Additional PUC
(Rs mn)
0.5
15.5
155.4
0.0
13.4
399.8
Increased PUC
(Rs mn)
15.5
31.0
186.5
186.5
199.9
599.7
Chart 5: Shareholding pattern

NRIs
3.3%
FIIs & OCBs

3.5%
MFs, FIs & Banks

8.5%
Domestic Cos.
3.0%
Resident Individual
40.5%
Promoters
41.2%
Cipla Limited
August 24, 2000
Mumbai
15
ICICI Securities
Chart 6: Trend in PBT, PAT & Accretion to reserves
14,500
4,000
PBT
Accretion to reserves (Rs mn)
PAT (Adj)
3,500
3,000
10,500
2,500
8,500
4,000
Total Op. Income

Op. Profit (RHS)
EBIDTA (RHS)
12,500
3,500
2,000
2,500
6,500
(Rs mn)
3,000
(Rs mn)
(Rs mn)
Chart 7: Op. Income, Op. Profit and EBIDTA trend
2,000
1,500
4,500
1,000
2,500
500
500
1998
1999
2000
2001
2002
1,500
1,000
1998
2003
1999
2000
2001
2002
2003
Chart 8: Trend in EPS
Chart 9: Trend in ROCE and RONW

ROCE (%)
36
EPS (Rs)
50
RONW (%)
44.5
45
32
40
34.1
35
26.8
30
25
20
19.2
28
21.1
24
15
10
5
1999
2000
2001
2002
2003
20
1998
1999
2000
2001
2002
2003
16
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Table 8: Profit and Loss statement

1998
4,829
8
4,837
1999
5,701
27
5,728
2000
6,925
28
6,953
2001
8,307
40
8,347
2002
10,153
45
10,198
2003
12,621
50
12,671
(2,409)
(76)
(225)
(872)
(52)
(3,634)
(2,790)
(93)
(291)
(1,030)
(68)
(4,273)
(3,554)
(107)
(349)
(1,363)
(106)
(5,479)
(4,245)
(125)
(415)
(1,578)
(116)
(6,480)
(5,158)
(142)
(487)
(1,878)
(122)
(7,787)
(6,374)
(177)
(593)
(2,272)
(126)
(9,542)
Operating profit
Add: Other income
1,203
157
1,456
253
1,474
329
1,868
423
2,411
496
3,130
644
EBIDTA
Depreciation
EBIT
Gross interest
1,360
(87)
1,273
24
1,708
(135)
1,573
29
1,804
(133)
1,670
11
2,290
(151)
2,140
18
2,907
(190)
2,716
12
3,773
(235)
3,538
9
PBT
Less: Adjusted tax
PAT (Adj.)
Add: Extra ordinary income net of tax
PAT (Reported)
1,249
(305)
944
76
1,020
1,545
(395)
1,150
1,659
(396)
1,263
68
1,331
2,122
(513)
1,608
2,704
(657)
2,047
3,529
(861)
2,668
1,608
2,047
2,668
Net sales
Other related income
Total operating income
Less:
Raw materials incl inventory adjust
Power and fuel
Manpower
SGA
Other expenses
Total expenses
1,150
Table 9: Quarterly results (Q1FY2001)

(Rs million, quarter ending June 30)
FY2000
FY01
% growth
1,644
1,542
102
360
2,004
1,940
1,720
220
460
2,400
18.0
11.6
115.7
27.8
19.8
51
(1,565)
490
(3)
487
(35)
452
(130)
322
76
(1,911)
564
(4)
560
(38)
523
(135)
388
48.6
22.1
15.3
33.3
15.2
7.1
15.8
3.8
20.7
Domestic % sales
Exports % sales
82.0
18.0
80.8
19.2
OPM (%)
PBDIT/sales (%)
PBDT/sales (%)
PBT/sales (%)
PAT/sales (%)
21.9
24.4
24.3
22.5
16.0
20.4
23.5
23.4
21.8
16.2
Sales breakup
Domestic
Formulations
Generic generics
Exports
Net sales
Other income
Total expenses
PBDIT
Interest
PBDT
Depreciation
PBT
Tax
Net profit
17
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Table 10: Balance sheet

(Rs million, as on March 31)
1998
1999
2000
2001
2002
2003
Liabilities
Paid up share capital
Reserves & surplus
Misc expenses not W/Off
Net worth
Total debt
200
3,443
4
3,639
186
200
4,424
4
4,620
336
600
5,155
3
5,752
196
600
6,580
3
7,177
100
600
8,361
2
8,959
100
600
10,662
2
11,260
50
Total Liabilities
3,825
4,957
5,948
7,277
9,059
11,310
1,787
(613)
1,175
50
1,225
728
2,139
(716)
1,423
26
1,449
1,404
2,424
(843)
1,581
37
1,618
1,950
3,061
(994)
2,067
200
2,267
2,500
3,861
(1,184)
2,676
200
2,876
2,930
4,701
(1,420)
3,281
160
3,441
3,800
Current assets
Inventory
Debtors
Loans and advances
Cash and bank balances
Other current assets
Total current assets
1,479
535
1,397
30
87
3,529
1,584
592
1,612
35
73
3,897
2,122
808
1,715
43
47
4,736
2,466
995
1,990
58
75
5,583
2,996
1,274
2,427
70
91
6,857
3,702
1,618
3,010
121
113
8,564
Current liabilities and provisions

Current liabilities
Sundry creditors
Other liabilities
Provisions
Total current liabilities and provisions
359
242
1,056
1,657
398
214
1,181
1,794
797
466
1,093
2,356
888
444
1,741
3,073
960
491
2,154
3,604
1,046
627
2,822
4,495
Net current assets
1,872
2,104
2,380
2,510
3,253
4,069
Total Assets
3,825
4,957
5,948
7,277
9,059
11,310
1998
1,020
83
157
76
1999
1,150
103
253
-
2000
1,331
127
329
68
2001
1,608
151
423
-
2002
2,047
190
496
-
2003
2,668
235
644
-
Operating cash flow

WC Cash outflow
Other uses of cash
870
379
(91)
1,000
123
103
1,061
355
(86)
1,336
440
(325)
1,741
737
(6)
2,259
965
(200)
Less: Capex
Less: Investments
241
423
327
676
296
546
800
550
800
430
800
870
Add
Increase in equity
Increase in borrowings
Reserve adjustments
Total external funds raised
(31)
(2)
(33)
150
(2)
149
(140)
(1)
(142)
(96)
(2)
(98)
(1)
(1)
(50)
(4)
(54)
Other income
Extra ordinary Income
Dividend paid
157
76
121
253
166
329
68
197
423
181
496
264
644
363
-3
15
12
51
Assets
Fixed Assets
Gross Block
Less: Accu. Depreciation
Net Block
Add: CWIP
Total fixed assets
Investments
Current assets, loans & advances
Table 11: Cash flow statement

PAT
Add depreciation
Less other income
Less extra ordinary income
Total increase/Decrease in cash

18
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
Table 12: Key financial ratios

1999
19.2
41.4
21.4
37.0
226
3.5
16,188
28.4
8.5
2000
21.1
37.7
23.3
34.1
94
8.4
47,754
26.5
6.9
2001
26.8
29.5
29.3
27.0
118
6.7
47,658
20.8
5.7
2002
34.1
23.1
37.3
21.3
148
5.4
47,658
16.4
4.7
2003
44.5
17.8
48.4
16.4
186
4.3
47,608
12.6
3.8
21.8
24.7
18.4
25.6
21.0
9.9
8.7
21.4
5.6
1.3
27.3
26.0
20.1
27.0
26.7
27.3
27.2
22.2
26.9
29.1
30.3
29.8
24.3
29.8
29.8
24.9
12.6
11.5
27.6
22.6
19.5
25.4
16.4
14.8
29.3
22.6
20.1
21.2
19.9
18.3
25.8
19.1
18.2
22.4
19.9
18.5
27.2
20.4
19.3
23.6
18.3
17.1
28.4
21.7
20.1
24.7
18.2
17.1
29.7
22.8
21.1
Capital Efficiency Ratios

ROCE (%)
34.3
RONW (%)
25.9
Dividend payout ratio (%)
11.9
Debt/Equity ratio (%)
5.1
NWC/Total assets (%)
39.2
Interest coverage ratio (nos)
52.3
DSCR (nos)
43.1
32.5
24.9
14.5
7.3
33.0
54.8
45.5
28.6
22.0
14.8
3.4
28.8
146.5
123.3
29.8
22.4
11.3
1.4
30.3
120.6
99.9
30.3
22.8
12.9
1.1
32.1
226.3
187.2
31.6
23.7
13.6
0.4
33.2
393.1
323.3
EPS (Rs)
PER (x)
CEPS (Rs)
P/CF (no.)
BV (Rs)
P/BV (nos)
EV (Rs mn)
EV/EBIDTA (nos)
EV/Sales (nos)
1998
15.7
50.4
17.2
46.2
176
4.5
16,038
35.4
9.9
Growth Ratios
EPS gth (%)
CEPS gth (%)
Operating Income gth (%)
EBIDTA gth (%)
Operating profit gth (%)
Operating Ratios
Operating profit margins (%)
Other income/PBT (%)
Other income/EBIDTA (%)
PBDT margins (%)
PBT margins (%)
PAT margins (%)
19
Cipla Limited
August 24, 2000
Mumbai
ICICI Securities
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Cipla Limited
August 24, 2000
Mumbai
20
ICICI Securities
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Cipla Limited: Company Report

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August 24, 2000

ICICI Securities and Finance Company Ltd.

THIS RESEARCH REPORT IS STRICTLY

This report does not constitute an invitation

Cipla Limited* (CIPL.BO, CIPL.NS)

Domestic pharmaceutical formulations

Source: Company data

New product launches

Etoposide For various cancers

RESEARCH AND DEVELOPMENT

R&D - fired by ICE

New drug delivery systems (NDDS)

Cipla Ltd (RHS)

Source: CMIE, Company data

Share price performance

Indian Pharma Index

Source: CMIE, i-SEC estimates

P/E vs. Earnings growth comparison

P/E 2000 P/E 2001 P/E 2002

Chart 4: PE vs. Earnings growth for pharmaceutical sector

Source: i-SEC estimates, Consensus estimates

MANAGEMENT AND BACKGROUND

Chart 5: Shareholding pattern

FIIs & OCBs

MFs, FIs & Banks

Chart 6: Trend in PBT, PAT & Accretion to reserves

Total Op. Income

Chart 7: Op. Income, Op. Profit and EBIDTA trend

Source: Company data, i-SEC estimates

Chart 8: Trend in EPS

Chart 9: Trend in ROCE and RONW

Source: Company data, i-SEC estimates

Table 8: Profit and Loss statement

Table 9: Quarterly results (Q1FY2001)

Table 10: Balance sheet

Current liabilities and provisions

Net current assets

Operating cash flow

Table 11: Cash flow statement

Total increase/Decrease in cash

Table 12: Key financial ratios

Capital Efficiency Ratios

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