By Sarabjit Kour Nangra, Sushant Dalmia (Angel Broking)

Performance Highlights

- Net Sales rises 5%: For 2QFY2010, Cipla reported Net Sales of Rs1,371.2 (Rs1,302.5cr), which was up a mere 5.3% and lower than our estimate of Rs1,453.8cr. This dismal Sales performance was on account of the lackluster performance by the Export and Domestic Formulation businesses. While Export Formulations de-grew 3.4% to Rs581.9cr (Rs602.4cr) in spite of Rupee depreciating by 11% yoy on an average during 2QFY2010, the Domestic Formulations business grew by a tepid 6.8% to Rs631.4cr (Rs591.3cr) as against the Industry growth rate of 11-12%. Management indicated that the dismal performance on the Sales front was on account of loss of anti-retroviral drugs tenders on account of price competition both on the Export and Domestic fronts. However, Export API grew 37.5% to Rs170.6cr (Rs124.0cr).

For 1HFY2010, the company reported Net Sales of Rs2,696.4cr (Rs2,473.2cr) up 9.0% yoy. On the Export front, the company reiterated achieving Top-line of Rs3,000cr for FY2010, of which, 48% has been achieved in 1HFY2010.

- OPM expands by 10.4%: Cipla reported OPM of 22.5% (excluding technical know-how fees), which expanded by 10.4% yoy on the back of favorable currency movement and lower Raw Material cost. During the quarter, the company reported forex gain of Rs7.5cr (against loss of Rs104.5cr in 2QFY2009), while Raw Material cost increased by a mere 1.9% on account of change in product mix indicating that the company is looking at profitable growth. Excluding the forex impact, OPM expanded by 178bp to 22.0% (20.2%). For 1HFY2010, the company reported OPM of 22.2% (13.1%).

- Net Profit rises 82%: Cipla reported Net Profit of Rs275.7cr (151.5cr), up 82.0% yoy albeit on a low base. Excluding the forex impact, Net Profit grew 14% yoy driven by OPM expansion and higher Other Income. The company reported Other Income of Rs84.5cr (Rs69.1cr), up 22.3% yoy, of which technical know-how fees comprised Rs50.8cr (42.9cr), up 18.3%. For 1HFY2010, Net Profit came in at Rs517.5cr (Rs291.4cr), up 77.5% yoy.

Key developments

- Cipla raised Rs675cr during the quarter via QIP, which it plans to spend for capex and debt re-payment.

- The company plans to launch its first bio-tech anti-cancer drugs globally by end FY2011, which are in nature of Avastin and Herceptin.

- Cipla expects to launch inhalers (Salbutamol) in Europe in 2HFY2010.

Outlook and Valuation

Cipla has posted dismal 2QFY2010 numbers, especially on the Top-line front, with both Exports (in spite of Rupee depreciation by 11% during the quarter) and Domestic Formulations (Industry growth of 11-12%) posting a disappointing performance. Further, given the supply-based model, we believe that in order to clock healthy growth in Top-line, the company will continue requiring additional capex, which will suppress its Return Ratios.

At Rs301, the stock is trading at 22.2x FY2010E and 20.2x FY2011E Earnings. We recommend a Reduce on the stock, with a Target Price of Rs268 given the rich valuations.