1QFY2014 Result Update | Pharmaceutical

August 12, 2013

Cipla
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Adj. Net profit 1QFY2014 2,308 246 1,382 512 485 4QFY2013 1,917 118 1,206 364 240 % chg qoq 20.4 108.4 14.6 40.7 101.9 1QFY2013 1,932 92 1,221 508 409 % chg yoy 19.4 167.7 13.2 0.8 18.7

BUY
CMP Target Price
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 32,975 904 0.6 435/346 177,221 2 18,789 5,566 CIPL.BO CIPLA@IN

`411 `477
12 months

Source: Company, Angel Research

Cipla reported a better-than-expected set of results for 1QFY2014, both the on sales and profitability fronts. Its net sales grew 19.4% yoy to `2,308cr vs our expectation of `2,113cr. The gross margin dipped by 328bp, while the OPM (excluding technical know-how fees) came in line with our expectation at 22.2%, down 410bp from the corresponding quarter of the previous year. However, a significant rise in other income aided an 18.7% yoy growth in the net profit to `485cr vs our expectation of `367.2cr. The other income during the quarter was at `246.3cr vs `92cr in 1QFY2013. We recommend a Buy rating on the stock. Results better than expectations: For 1QFY2014, the company reported better-than-expected numbers on the sales and bottom-line fronts. The net sales and profits for the quarter came in at `2,308cr and `479cr, registering a growth of 19.8% yoy and 20.4% yoy respectively. The growth was driven by the domestic and exports segments, which posted a growth of 16.7% and 20.6% yoy respectively during the period. The OPM (excluding technical know-how fees) came in line with our expectation at 22.2%, down by 410bp from the corresponding period of the previous year. A significant rise in other income aided an 18.7% yoy growth in net profit to `485cr vs our expectation of `367.2cr. Outlook and valuation: For FY2014, the Management has given a revenue growth guidance of 14-15% (excluding Medpro). We expect the companys net sales to post a 15.5% CAGR to `10,796cr and EPS to record a 12.1% CAGR to `23.9 over FY201315E. We recommend a Buy on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 36.8 16.1 27.7 19.4

Abs. (%) Sensex Cipla

3m (6.0) 1.1

1yr 6.8 17.0

3yr 3.6 27.7

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

FY2012 6,848 8.4 1,173 18.1 14.6 21.7 28.1 16.4 15.2 4.3 4.8 21.9

FY2013 8,087 18.1 1,524 30.0 19.0 24.8 21.7 18.3 18.3 3.7 4.1 16.7

FY2014E 9,274 14.7 1,685 10.5 21.0 23.1 19.6 17.2 16.3 3.1 3.5 15.3

FY2015E 10,796 16.4 1,916 13.7 23.9 23.1 17.2 16.8 16.8 2.7 2.9 12.7

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Cipla | 1QFY2014 Result Update

Exhibit 1: 1QFY2014 ( Consolidated) 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 Share of Profit /( loss ) of associate Extra-ordinary items/(income) PAT after extra-ordinary item Adj. PAT EPS (`)
Source: Company, Angel Research

1QFY2014 2,308 246.3 2,554 1382 59.9 512 22.2 40.7 85 633 154 479 5 0 485 485 6.0

4QFY2013 1,917 118.2 2,025 1206 62.9 364 19.0 18.8 85 378 139 240 1 0 240 240 3.0

% chg qoq 20.4 108.4 26.1 14.6 40.7 116.7 (0.1) 67.2 10.7 100.0

1QFY2013 1,932 92.0 2,024 1221 63.2 508 26.3 2.7 80 518 120 398 3 (40)

% chg yoy 19.4 167.7 26.2 13.2 0.8 1385.0 6.8 22.3 28.0 20.5

FY2013 8,087 427.7 8,515 5134 63.5 2005 24.8 33.9 330 2069 544 1524 (6) (27)

FY2012 6,848 349.0 7,197 4109 60.0 1486 21.7 38.3 312 1484 307 1178 3 37 1144 1173 14.6

% chg yoy 18.1 22.6 18.3 25.0 34.9 (11.6) 5.8 39.4 77.6 29.4

101.9 101.9

440 409 5.1

10.3 18.7

1545 1524 19.0

35.0 30.0

Exhibit 2: 1QFY2014 Actual vs. Angel estimates

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

Actual 2,308 246 512 154 485

Estimates 2,113 93 468 109 367

Variance 9.2 164.4 9.4 40.8 32.2

Top-line growth better than expected

Cipla posted better-than-expected results for 1QFY2014. Its sales grew 19.4% to `2,308cr vs our expectation of `2,113cr. A standalone sales break-up suggest that the growth was driven by the domestic and exports segments, which posted a growth of 16.7% and 20.6% yoy during the period to `1,132cr and `1,180cr respectively. Overall exports contributed 51.0% to overall sales, while domestic sales contributed the rest. Formulation exports posted a growth of 27.6% yoy. The growth in export revenues was primarily due to growth in anti-retroviral, anti-asthma and anti-allergic segments. In exports, the API segment reported a 13.3% yoy dip to end the period at `146cr.

Operating profit margin dips

The gross margin dipped by 328bp, while the OPM (excluding technical know-how fees) came in line with our expectation at 22.2%, ie down by 410bp from the last corresponding period, mainly on back of the 46.5% yoy rise in employee costs.

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Cipla | 1QFY2014 Result Update

The increase in staff cost by `94cr is due to increase in manpower and annual increments, adjusting for which, the rise in the employee cost was 4.7% yoy.

Net profit much better than expectation

A significant rise in other income, aided the 18.7% yoy growth in net profit to `485cr vs our expectation of `367.2cr. The other income during the quarter was at `246.3cr vs `92cr in 1QFY2013.

Concall takeaways

For FY2014, the company has guided for a revenue growth of 14-15% yoy (excluding Medpro). Medpro would be consolidated starting 2QFY2014. DPCO 2013, would impact around 2-3% of domestic formulation sales of the company in FY2014. The Management stated the company has 22 partners in the US at the moment. The company has mentioned that it hasnt yet filed any product on its own in the US. During the quarter, 6 filings were made with partners. Overall, out of the 76 products approved, 47 have been commercialized at the moment. Capex for FY2014 would be around `400cr.

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 53% to the total turnover of FY2013, 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 47 have been launched, out of the 76 approved. 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. With the Medpro acquisition, the company now has a front end in the fast growing African market. The acquisition though will not add much, as a majority of the products of the company were already supplied by the company. Overall we expect the companys exports to grow at a CAGR of 18.1% during FY2013-15. 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 47% to the total turnover in FY2013. 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
August 12, 2013

Cipla | 1QFY2014 Result Update

launching biosimilars, particularly relating to the oncology, anti-asthmatic and anti-arthritis categories. Overall we expect the companys domestic formulation business to post a CAGR of 14.0% over FY2013-15. Valuation: For FY2014, the Management has given a revenue growth guidance of 14-15% (excluding Medpro).We expect the companys net sales to post a 15.5% CAGR to `10,796cr and EPS to record a 12.1% CAGR to `23.9 over FY201315E. We recommend a Buy on the stock.

Exhibit 3: Key assumptions

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

FY2014E 13.0 18.8 20.0 23.1

FY2015E 15.0 17.5 20.0 23.1

Exhibit 4: One-year forward PE band

600 500 400

(` )

300 200 100 -

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Feb-13

Price

10x

15x

20x

25x

Source: Company, Angel Research

August 12, 2013

Aug-13

Cipla | 1QFY2014 Result Update

Exhibit 5: 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 Accumulate Buy Buy Buy Accumulate Buy Neutral Buy Neutral Accumulate Buy Neutral Neutral CMP Tgt. price (`) 156 161 708 411 2,218 43 2,331 64 643 801 359 2,479 507 (`) 165 242 894 477 2,535 73 78 904 384 Upside 5.9 50.0 26.3 16.1 14.3 70.0 21.7 12.8 6.8 11.2 7.8 15.8 17.2 17.5 2.6 35.0 8.4 14.3 18.6 16.0 24.4 25.5 FY2015E EV/EBITDA (x) 7.8 6.1 12.7 12.7 12.5 3.5 25.0 5.6 10.2 11.9 9.2 15.0 14.5 1.5 1.0 2.0 2.9 2.5 0.8 5.9 0.8 2.2 2.6 1.2 2.3 5.9 FY13-15E 25.5 26.4 18.1 12.1 10.8 16.3 (7.3) 28.0 29.1 21.0 (2.2) 15.0 8.8 FY2015E 34.2 13.1 15.2 16.8 18.3 11.4 30.6 15.0 25.1 29.0 9.7 14.7 29.4 34.7 18.9 22.9 16..8 21.8 11.0 27.5 14.4 25.7 25.8 19.2 17.1 22.0 % PE (x) EV/Sales (x) CAGR in EPS (%) RoCE (%) RoE (%)

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

Company Background
Cipla is a leading pharmaceutical 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.

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Cipla | 1QFY2014 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 % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) 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 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 5,412 52.2 5,360 265 5,625 7.4 4,287 2,453 445 319 1,070 1,073 13.2 20.0 167 906 13.8 16.9 28 88 7.2 1,231 9.1 (95.0) 1,326 243.5 18.4 1,083 1,083 1,006 0.2 20.2 12.5 12.5 26.3 6,385 68.4 6,317 7 6,324 12.4 4,955 2,775 635 566 979 1,362 26.9 21.6 273 1,089 20.2 17.2 25 97 8.3 1,167 (5.2) 4.9 1,162 195.4 16.8 967 22 990 993 (1.3) 15.7 12.4 12.4 (1.3) 6,956 108.1 6,848 173 7,021 11.0 5,362 2,739 705 773 1,145 1,486 9.1 21.7 312 1,174 7.8 17.1 38 176 11.9 1,485 27.2 36.9 1,448 306.5 21.2 1,141 3 1,144 1,173 18.1 16.7 14.6 14.6 18.1 8,196 108.7 8,087 193 8,279 17.9 6,081 2,953 641 1,036 1,451 2,005 35.0 24.8 330 1,675 42.7 20.7 34 235 11.4 2,069 39.3 (26.7) 2,095 544.3 26.0 1,551 (6) 1,545 1,524 30.0 19.1 19.0 19.0 30.0 9,417 142.7 9,274 255 9,529 15.1 7,132 3,385 745 1,244 1,758 2,142 6.8 23.1 334 1,808 8.0 19.5 34 156 7.1 2,185 5.6 2,185 499.9 22.9 1,685 1,685 1,685 10.5 18.2 21.0 21.0 10.5 10,962 166.1 10,796 288 11,084 16.3 8,302 3,941 867 1,492 2,002 2,494 16.4 23.1 364 2,130 17.8 19.7 34 171 6.7 2,555 16.9 2,555 638.7 25.0 1,916 1,916 1,916 13.7 17.7 23.9 23.9 13.7

August 12, 2013

Cipla | 1QFY2014 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Preference Capital Reserves & surplus Shareholders funds Minority interest Total loans Other long term liabilities 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 4,367 62 1,226 3,079 1,214 3,153 6,095 2,897 886 2,011 684 246 4,241 1,146 3,094 285 591 407 4,220 96 1,162 2,962 1,145 3,075 7,452 4,626 1,411 3,215 371 1,269 378 4,116 90 568 3,458 1,387 2,729 7,963 5,318 1,708 3,610 378 2,532 363 4,775 143 573 4,058 1,311 3,464 10,347 5,818 2,042 3,776 378 10 2,532 408 6,223 937 649 4,637 1,484 4,739 11,844 6,318 2,406 3,912 378 10 2,532 475 7,992 1,838 756 5,398 1,727 6,265 13,572 179.2 6,095 0.9 213.1 7,452 161 5,750 5,911 5.1 161 6,506 6,666 571.9 161 7,478 7,639 29.2 30.0 31.2 233.2 7,963 161 8,858 9,019 966.9 30.0 50.4 280.5 10,347 161 10,355 10,516 966.9 30.0 50.4 280.5 11,844 161 12,083 12,244 966.9 30.0 50.4 280.5 13,572 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

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Cipla | 1QFY2014 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital 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 FY2010 FY2011 FY2012 FY2013 1,326 167 (131) 256 1,107 (522) (166) (688) 669 (935) (155) 13 (408) 10 53 63 1,162 273 (295) 301 840 (944) (344) (1,289) 568 (225) 161 503 55 63 96 1,448 312 370 275 1,855 (472) (678) (1,150) (482) (187) (42) (711) (6) 96 90 2,095 330 (667) 518 1,241 (698) (1,263) (1,961) 957 (188) 4 773 53 90 143 FY2014E 2,185 334 (527) 529 1,463 (500) (500) (188) 19 (169) 794 143 937 FY2015E 2,555 364 (691) 623 1,605 (500) (500) (188) (16) (204) 901 937 1,838

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Cipla | 1QFY2014 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.) (0.01) (0.1) 32.0 0.1 0.3 (0.0) (0.0) 0.1 0.4 0.0 0.0 (0.1) (0.3) 2.0 94 111 54 196 1.8 99 88 60 175 1.6 104 83 57 146 1.7 93 71 46 131 1.7 105 80 44 136 1.8 116 89 44 135 15.7 17.5 19.6 16.1 17.5 15.8 15.2 16.1 16.4 18.3 19.3 18.3 16.3 17.8 17.2 16.8 19.5 16.8 16.9 81.6 1.0 13.6 4.9 0.1 14.4 17.2 83.2 0.9 13.5 7.2 0.0 13.7 17.1 78.8 0.9 12.5 10.1 0.0 12.5 20.7 74.0 0.9 14.0 5.0 0.0 14.4 19.5 77.1 0.9 13.6 2.7 0.0 14.1 19.7 75.0 1.0 14.5 2.7 0.0 14.5 12.5 12.5 15.6 2.0 73.6 12.4 12.4 15.7 2.8 83.0 14.6 14.6 18.1 2.0 95.1 19.0 19.0 23.4 2.0 112.3 21.0 21.0 25.1 2.0 131.0 23.9 23.9 28.4 2.0 152.5 32.8 26.4 5.6 0.5 6.1 30.7 5.4 33.2 26.1 5.0 0.7 5.2 24.3 4.4 28.1 22.7 4.3 0.5 4.8 21.9 4.1 21.7 17.6 3.7 0.5 4.1 16.7 3.2 19.6 16.3 3.1 0.5 3.5 15.3 2.8 17.2 14.5 2.7 0.5 2.9 12.7 2.3 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

August 12, 2013

Cipla | 1QFY2014 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

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%)

August 12, 2013

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