Investor's Eye: Update - Cipla; Special - Q1FY2014 earnings review

 

Investor's Eye [August 23, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Cipla Recommendation: Buy Price target: Rs490 Current market price: Rs396 Targets $5 billion by 2020 We met the management of Cipla on the sidelines of its 77th annual general meeting. Following are the key takeaways: Ambitious growth plans; USA, South Africa would be thrust areas: Cipla aims to achieve $5 billion revenues by the end of 2020 (from $1.3 billion in FY2013), including $1 billion from the US market (current revenues from the US market at nearly $200 million). Besides, it also plans to achieve a sizable growth in the South African market after the acquisition of Cipla Medpro. The long-term revenue target of the company implies a compounded annual growth rate (CAGR) of 21% over FY2013-20. Cipla Medpro to be earnings accretive from next year: Cipla acquired 100% stake in its marketing partner Cipla Medpro in South Africa for Rs2,707 crore in July 2013. The management indicated that after the consolidation of Cipla Medpro, contribution from the South African market would jump to 25% of sales. However, Cipla Medpro's acquisition would be earnings accretive from the second year of acquisition (ie from FY2015). The acquisition of Cipla Medpro was funded entirely through internal accruals.  New pricing policy to impact 2-3% of total revenues: As per the management's assessments, the new pharma pricing policy (NPPP) would lead to an erosion of 2-3% of the total revenues. However, the company would effectively compensate the loss through an expansion in volume. A crucial court hearing in next month: A crucial hearing in the Supreme Court of India related to an alleged overcharging of drugs by the company is scheduled on September 10, 2013. Cipla has so far received a demand notice of Rs1,656 crore from the National Pharmaceutical Pricing Authority (NPPA) for allegedly selling the drugs at higher prices than stipulated under the price-control policy. A positive legal outcome will remove the major overhang for the company.  We marginally tweak estimate to factor sooner than expected consolidation of Cipla Medpro; price target kept intact: We have increased our earnings estimate by 4.6% for FY2015 to factor a sooner than expected consolidation (earlier we expected consolidation by Q4FY2014) and a better than expected performance in Q1FY2014. However, we prefer to maintain our price target at Rs490 (implies 19x FY2015E earnings per share [EPS]). We maintain our Buy rating on the stock.      SHAREKHAN SPECIAL Q1FY2014 earnings review  Q1 results show no signs of respite; earnings downgrades pick up Key points Aggregate growth turns negative; 11 Sensex constituents reported a decline in their earnings: On an aggregate basis, the Sensex companies reported a decline of 1.5% year on year (YoY) in their earnings (a 6.5% growth excluding oil companies). The performance was weaker compared with the expectations, which were already muted. What's more concerning is that more than one-third of the companies (and six sectors) reported a decline in earnings. The disappointment came from companies across sectors, like Tata Motors, Bharat Heavy Electricals Ltd (BHEL), GAIL, ONGC and Tata Power. Moreover, the deterioration in the asset quality of the banking sector is another worrying factor affecting the outlook for corporate earnings. On the positive side, fast moving consumer goods (FMCG), pharmaceutical (pharma) and information technology (IT) sectors, and Reliance Industries Ltd (RIL) managed to post a double-digit growth in earnings. Companies like Cipla, Sun Pharmaceutical Industries (Sun Pharma) and Mahindra and Mahindra (M&M), and metal counters surprised on the positive side. Revenue growth falters: As expected, the revenue growth of the Sensex companies was tepid (up 2% YoY) indicating significant softening of the demand in the economy. One-third of the Sensex companies reported a decline in revenues. These companies were mainly from automobiles (auto), capital goods and metal sectors. Out of the 30 companies in the Sensex 11 managed to post a double-digit growth in revenues and these were mainly from the banking, IT and pharma sectors. Even the FMCG sector struggled to grow in double digits due to volume pressures which indicates a broader slowdown in revenues. Margin pressures re-emerge: The decline in the margins of the Sensex companies (ex banks) was slightly higher than expected as the margins contracted by 100 basis points quarter on quarter (QoQ) to 18% levels (18.1% in Q1FY2013). The overall EBITDA growth itself was around 1.5% YoY for the Sensex companies. From a sectoral perspective, the capital goods companies faced higher margin pressure (on a quarter-on-quarter [Q-o-Q] basis) followed by the metal and power sectors. However, IT, oil & gas and telecommunications (telecom) sectors witnessed some margin expansion on a Q-o-Q basis. Going ahead, due to a sharp depreciation in the local currency (which has made imports expensive) and a drop in the pricing power the margin pressures may continue. Earnings downgrades picks up: Given the disappointment of the Q1FY2014 results, weak macro-economic data releases and the series of measures taken by the Reserve Bank of India (RBI) to tighten liquidity, earnings downgrades have picked up. Barring a few sectors (like IT, pharma) most sectors (especially banking, capital goods) saw sharp downgrades in the consensus earnings estimate during Q1FY2014. The consensus FY2014 earnings growth estimates for Sensex now stands at about 6% compared with 15% expected at the beginning of FY2014. Given the sharp volatility in the exchange rates, the rise in interest rates and policy inertia, there is scope for further downgrades in the consensus earnings estimate for sensex.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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