cipla ltd 120502 karvy
TRANSCRIPT
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7/31/2019 Cipla Ltd 120502 Karvy
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Pharmaceuticals May02,2012
CiplaLtd.
Bloomberg:CIPLAINReuters:CIPL.BO BUY
InstitutionalEquities
IndiaResearch
INITIATIONREPORT
Recommendation
CMP: Rs312
TargetPrice: Rs375
Upside(%) 20%
StockInformationMarketCap.(Rsbn/US$mn) 251/4,753
52weekHigh/Low(Rs) 360/273
3mADV(Rsmn/US$mn) 532/10.1
Beta 0.6
Sensex/Nifty 17,319/5,248
Shareoutstanding(mn) 803
StockPerformance(%)1M 3M 12M YTD
Absolute 2.3 (10.9) 0.8 (2.5)
Rel.toSensex 2.8 (11.6) 11.4 (13)
Performance
Source:Bloomberg,KarvyInstitutionalResearch
1YearForwardPEBand
Source:Bloomberg,KarvyInstitutionalResearch
AnalystsContactRahulSharma
022 61844310
NishithSanghvi022 61844326
25 027 029 031033 035 037 0
15,500
17,500
19,500
Apr11
Jun11
Jul11
Aug11
Oct11
Nov11
Dec11
Feb
12
Mar12
Apr12
Sensex(LHS) CIPLA(RHS)
100
200
300
400
500
600
Apr08
Apr09
Apr10
Apr11
Apr12
(Rs) MeanP/E
15x
20x
25x
30x
Onanupswing;SustainableGrowthPathSemiurbanThrust,Respiratory&GynaecologytoSustainGrowth:Ciplas
reach in semiurban / (TierII to TierVI cities) segment is formidable and is
better than any of its listed peers. Its panIndian presence with 7,000field
forceand58%portfolioinacutesegmentwillbethemajorgrowthdrivers.Its
nichetherapeutic segments Respiratory (28%) & Gynaecology(12%) will
continue to outperform the industry. The Company hasbeen proactive in
launchesinboththesesegments,whilethepricehikeshavebeenundertaken
selectivelyinRespiratorysegment.
Launch of Combination Inhalers Exploring HighMargin Opportunity:
CiplahaslaunchedfourproductsinseveralEUmarkets,whileitisplanning
tolaunchfivemorecombinationproductsinnextfiveyears.Webelievethat
thelaunchofcombinationproductsintheEUmarketswithSeretidelikely
tobe launched in FY13 is one of the key triggers for Cipla. Our revenue
assumptions on combination inhalers are above street estimates as we have
assumedacombinationlaunchinFY13EandFY14Ewhichmaybeariskto
ourassumption.
Return Ratios & Asset Turnover to improve due to better utilsation of
IndoreSEZ:CiplahasspentRs.9bnforitsIndoreSEZ(ISEZ)facility,which
housesfacilityfororal,topicalinjectablesandothers.Thecompressionofthe
returnratios
and
asset
turnover
ratios
has
been
in
lieu
of
ISEZ.
We
believe
that with improving capacity utilisation at the ISEZ plant and maintenance
capex, the operating leverage will aid the key profitability ratios, going
forward.
Outlook&ValuationCiplas domestic formulations are expected to grow in line with the market
(on a highbase) onback of pricehike in select segments, product launches
andbetter MR productivity. Launch of combination inhalers in EU willalso
aid CAGR revenue growth of 14% in FY1114 period. Withbetter operating
leverage, focus on profitable products and segments, Ciplas profits would
record 18.5% CAGR in the same period. We initiate coverage on the stock
with BUYrecommendation with a target price of Rs. 375 per sharebasedon 19xFY14E. Our target price includes Rs. 1.1 coming from Lexapro
exclusivitysuppliestoTeva.
KeyFinancials
Y/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E
Netsales 56,057 63,194 68,714 81,232 91,878
EBITDA 13,106 12,709 15,422 19,025 21,920
NetProfit 9,733 9,497 10,784 13,686 15,802
EPS(Rs) 12.1 11.8 13.4 17.0 19.7
EPSgrowth(%) 25.7 2.4 13.6 26.9 15.5
EBITDAmargin(%) 23.4 20.1 22.4 23.4 23.9
PER(x) 25.7 26.4 23.2 18.3 15.9
Source:Company,KarvyInstitutionalResearch
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CiplaLtd.
ShareholdingPattern(%)
Source:BSE
RevenueBreakup
Source:Company
Promoter,
36.8
FII,16.1
DII,17.2
Publicand
Others,29.9
Domestic,
46%
Exports,54%
CompanyBackground
Cipla is one of thebiggest players in Indian formulations market
enjoying5.7%marketshare.KeytherapiesfortheCompanyinthe
domestic space include: Respiratory, AntiInfectives, Cardiac,
Gynaecology and GI. The Company has 70% market share inInhaler segment and its key brands in the same segment are:
Seroflo,Foracort,BudecortandAerocort.
Intheexportspace,theCompanyhasbeenworkingonalowrisk,
low margin partnership model, which restricts any marginupside
intheUS&EU.However,theCompanyisconsciouslychangingits
policy towards a more profitable model for the same. The
Company is now focusing on the inhaler opportunity, which is
expectedtoyieldsignificantprofitability,goingahead.
The recently commissioned Indore SEZ will be instrumental in
fulfilling
Ciplas
ambitions
to
fulfill
its
strong
growth
projections
inensuingtimes.
CompanyFinancialSnapshotProfit&loss
Y/EMar(Rsmn) FY12E FY13E FY14E
Netsales 68,714 81,232 91,878
EBIDTA 15,422 19,025 21,920
Depreciation 2,966 3,096 3,416
InterestExpense 134 101 130
PBT 13,742 17,107 19,753
Tax 2,958 3,421 3,951
Adj.PAT 10,784 13,686 15,802
EPS(Rs) 13.4 17.0 19.7
ProfitandLossRatios
EBIDTAMargin% 22.4 23.4 23.9
AdjNetMargin% 16.0 17.1 17.4
ValuationMultiples
P/E(x) 23.2 18.3 15.9
EV/EBIDTA(x) 15.7 12.5 10.7
P/S(x) 3.7 3.1 2.8
CashFlow
Y/EMar(Rsmn) FY12E FY13E FY14E
EBIT 12,456 15,929 18,504
(Inc.)/Decinworkingcapital 609 (5,736) (5,191)
CashFlowfromOps 13,065 10,194 13,314
Others (1,550) (3,151) (3,908)
Capex
(4,539) (4,400) (5,000)FreeCashFlow 6,977 2,643 4,406
ChangeinEquity
ChangeinDebt (2,201) 614 837
Investments (1,338)
CFfromFinancing (3,539) 614 837
ChangeinCash 3,438 3,257 5,242
BalanceSheet
Y/EMar(Rsmn) FY12E FY13E FY14E
TotalAssets 91,203 103,959 117,937
Netblock 30,983 32,587 34,171
CWIP 1,800 1,500 1,500
Investments 7,041 7,041 7,041
CurrentAssets
51,379 62,831 75,225
TotalLiabilities 91,203 103,959 117,937
Networth 73,760 83,442 94,662
Debt 2,213 2,827 3,663
CurrentLiabilities 12,795 15,255 17,216
DeferredTax 2,435 2,435 2,435
BalanceSheetRatios
RoE% 15.8 17.8 18.1
RoCE% 18.4 20.6 21.0
Debt/Equity 0.03 0.03 0.04
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CiplaLtd.
Valuation&Recommendation
Cipla has underperformed its peers in the last quarter mainly due to lower
performance in the preceding quarter. The stock is trading at reasonable
valuationsof
18.5xFY13E
and
16.0xFY14E,
which
is
at
a
discount
to
its
peers
by
15.6% for FY13E and 18.8% for FY14E. We value the corebusiness at 19xFY14E
withapriceofRs.374(lowerthan1yearforwardmeanmultipleof22.4x)andadd
Rs.1.1fortheLexaproopportunity.WeinitiatecoverageonthestockwithBUY
recommendationand a targetpriceofRs. 375 pershare that representsanupside
of20%fromcurrentlevels.
Exhibit1:1yearforwardPEBand
Source:Bloomberg,KarvyInstitutionalResearch
Exhibit2:ComparativeValuationP/E(x) EV/EBITDA(x) ROCE(%) ROE(%)
FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E
SunPharmaceuticalsInds.Ltd. 25.0 24.7 23.8 17.5 16.6 16.2 27.8 25.4 23.5 24.0 20.0 17.9
Dr.ReddysLaboratories 20.3 19.4 16.9 13.0 12.6 11.0 24.9 20.8 20.9 28.4 24.0 22.8
RanbaxyLabs N.A 23.0 22.4 14.1 17.9 16.9 N.A 16.0 15.0 N.A 27.2 22.5
LupinLaboratories 24.7 21.6 18.6 16.6 14.5 12.4 25.8 24.8 24.2 24.6 23.0 22.0
CadilaHealthcareLtd. 24.8 20.9 17.0 16.2 13.0 10.8 18.5 20.0 21.5 25.4 24.5 25.3
Cipla 23.2 18.3 15.9 15.7 12.5 10.7 18.4 20.6 21.1 15.8 17.8 18.1
Source:Company,KarvyInstitutionalResearch
OurView:
With
the
domestic
formulations
growing
in
line
with
the
market,
product rationalization in the exportsmarket,greater scale in Indore SEZ and
launchofcombinationinhalerintheEUmarketareexpectedtoactastriggersfor
the stock. We firmly believe that with the better performance on the three
parametersandlaunchofcombinationinhalersinEU,thediscountwouldshrink
tosingledigits.
Absolute&RelativeStockPerformance
CiplahasoutperformedtheSensex&BSEHealthcareIndexduringNov11Feb12
on an absolutebasis due to sustained sequential improvement in gross margins
owing to focus on profitability compared to volume growth. On a relativebasis,
duringDec11
Jan12,
Cipla
has
outperformed
the
Sensex
by
30%
on
the
back
of
expected quarterly results for Q3FY12. However, postresults the stock has
underperformedtheBSEHealthcareIndexduetodeclineinoperatingmarginsin
Q3FY12comparedtoQ2FY12.
100
150
200
250
300350
400
450
500
550
Apr08
Apr09
Apr10
Apr11
Apr12
(Rs)MeanP/E22.4
15x
20x
25x
30x
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CiplaLtd.
Exhibit3:AbsolutePerf.FromApril2011
Source: Bloomberg,KarvyInstitutionalResearch
Exhibit4:RelativePerf.FromApril2011
Source: Bloomberg,KarvyInstitutionalResearch
Exhibit5:AbsolutePerf.FromApril2011
Source: Bloomberg,KarvyInstitutionalResearch
xhibit6:RelativePerf.FromApril2011
Source: Bloomberg,KarvyInstitutionalResearch
ThestockhasgivenlowerreturnsfromMar11incomparisontoitspeersi.e.Sun
Pharma, Lupin and Dr. Reddys Labs (DRL), who benefitted from the
opportunities in the US market, while Cipla with its partnership model has not
seen any major upside. Commercialization of Indore SEZ and the consequent
impactoffixedoverheadshavealsonegativelyimpactedmarginperformance.
Ciplasperformancehasbeenlowerthanitspeers,ithasoutperformedtheSensex
return 6.7% and underperformed the BSE Healthcare Indexby 6%, the stock has
given 5.9% returns over the last 6 month on absolutebasis. However, on last 3
monthbasis, the stock has given negative returns of 10.9%, while the Sensex andBSEHealthcareIndexhavegiven0.3%and8.3%returns,respectively.
Our View: The underperformance can be attributed to lowerthananticipated
quarterlyresults.Onarelativebasis,thestockhasoutperformedtheSensexwhile
continuestounderperformtheBSEHC.
Exhibit7:StockPricePerformanceAbsoluteReturns(%) RelativetoSensexReturns(%)
1m 3m 6m 12m 1m 3m 6m 12m
Sensex (1.4) 0.3 (0.8) (12.6)
BSEHCIndex 4.4 8.3 11.9 9.5 5.8 8.0 12.7 22.1
Cipla 2.3 (10.9) 5.9 0.8 2.8 (11.6) 6.6 11.4
Source:Company,KarvyInstitutionalResearch
80
90
100
110
120
Apr11
May11
Jun11
Jul11
Aug11
Sep11
Oct11
Nov11
Dec11
Jan12
Feb12
Mar12
SensexIndex Cipla BSEHCIndex
95
100105
110
115120
125
130
135
140
Apr11
May11
Jun11
Jul11
Aug11
Sep11
Oct11
Nov11
Dec11
Jan12
Feb12
Mar12
SensexIndex Cipla BSEHCIndex
70
120
170
Apr11
May11
Jun11
Jul11
Aug11
Sep11
Oct11
Nov11
Dec11
Jan12
Feb12
Mar12
SensexIndex Cipla SunPharma
Lupin Dr
Reddy Cadila
80
90
100
110
120
130
140
150
Apr11
May11
Jun11
Jul11
Aug11
Sep11
Oct11
Nov11
Dec11
Jan12
Feb12
Mar12
SensexIndex Cipla SunPharma
Lupin DrReddy Cadila
BSEHCIndex
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CiplaLtd.
InvestmentRationale
Ourinvestmentthesisisbasedonthefollowingpremises:
HygieneFactorsinPlaceExpectSustainableGrowthinDomesticBiz
SemiUrbanThrusttoDriveGrowthoverNextTwoYears
Respiratory & Gynaecology Key Therapeutic Segments to Sustain StrongGrowth
FieldForceProductivityInlineWithPeersFurtherImprovementisLikely
DeriskedPartnershipModelRenegotiationsofExistingContractsforBetterReturn
Regulatorycompliant Facilities With No Overhang Renegotiation ofContractsisLikely
SupplyExclusivitytoTeva&AkorntoBoostConfidence
Launch of Combination Inhalers Exploring LowCompetition & HighMarginOpportunity
1.HygieneFactorsinPlaceExpectSustainableGrowth
inDomesticBizCiplas domestic business constitutes 47% of its total revenues. Currently, the
Company commands 5.7% market share (as per AIOCD AWACS) in domestic
pharmaceuticalspace.ItsdomesticbusinesshasgrownataCAGRof10%overthe
lastfiveyears.Ciplahasastrongfranchiseindomesticformulationsspacewitha
formidable position in the respiratory segment and diversified portfolio mix. Its
45%
of
domestic
revenues
come
from
Tier
II
to
Tier
VI
towns.
OurView:WebelieveCiplawillgrowmorethanmarketratesoverthenexttwo
yearsgiventhe7,000strongfieldforceandstrongpanIndiafranchise.
Ciplahasbeenavolumedrivencompanywithhighproportionofacuteproducts
in its portfolio. The acute products contribute 59% of the domestic formulations
sales of Cipla. It has been Ciplas practice to dole out higher bonus in acute
segment to exploit retailers discretionary sales techniques. Bonus doleout has
been high in antiinfectives space (24% of portfolio) and gynaecology (13% of
portfolio).
OurView:Thehighproportionofbonusaspercentageofsaleshasbeenthepolicy
ofthe
Company,
which
we
believe
will
continue
going
ahead.
Ciplas
MAT
growth
recordedintheacutespacehasbeen11.0%,whilethechronicgrowthhasbeenat
17.5%inMar12.Weexpect13.3%growthinFY13Eand13.4%growthinFY14Ein
domesticformulationsbusinessincludinggenerics.
2. SemiUrban Thrust to Drive Growth over Next Two
Years
Ciplas reach in the semiurban / (TierII to TierVI cities) segment is formidable
andbetterthanitslistedpeers.Itspenetrationinsemiurbanmarketisthehighest
amongst its domestic peers with stronger growth rates. Given the increased
disposable incomes in semiurban population and unpenetrated nature of the
market,webelievethatthissegmentwillshowhigherrevenuesgoingahead.
MarketShare
Source:AIOCD,AWACS
BonusPercentage
Source:AIOCD,AWACS
BreakupofGrowth
Source:AIOCD,AWACS
4.5
5.0
5.5
6.0
Mar11
May11
Jul11
Sep11
Nov11
Jan12
Mar12
(%)
8.0
8.5
9.0
9.5
10.0
10.5
11.0
500
1,000
1,500
2,000
2,500
3,000
3,500
Jun10
Aug10
O
ct10
D
ec10
F
eb
11
A
pr11
Jun11
Aug11
O
ct11
D
ec11
F
eb
12
(inmn) (%)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
TotalGR VolGR Pri ceGR NPGR
(%)
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CiplaLtd.
Exhibit8:DistributionofRevenues&GrowthinSemiUrbanSegment(YTD)%ofdomesticrevenuescomingfromsemiurbanmarkets Growth(in%9MFY12)
Cipla 45% 20%
Source:KarvyInstitutionalResearch,Company
Wehavefactoredingrowthforthedomesticspacemainlycomingfromthesemiurban markets. While webelieve the urban markets will grow in single digits as
thepenetrationhasbeenhigh,thegrowthinthesemiurbanspacewillcontinueto
bemaintainedat20%goingahead.
Exhibit9:BreakupofDomesticFormulations(Rs.mn)FY10 FY11 FY12E FY13E FY14E
UrbanMarketbreakup 11,739 13,148 14,537 15,529 16,507
GrowthYoY(%) 11 7 6
Semiurbanmarketbreakup 9,605 10,758 12,909 15,491 18,589
GrowthYoY(%) 20 20 20
Source:Karvy
Institutional
Research
OurView:CiplassemiurbansegmentwouldgrowfromRs.9.6bninFY10toRs.
18.6bn inFY14E,asstrongfieldforce,panIndiapresence,andunderpenetrated
nature of the market with a higher proportion of acute products will boost
growth.
3. Respiratory & Gynaecology Key Therapeutic
SegmentstoSustainStrongGrowth
Ciplas80%ofdomesticrevenuescomesfromTop5therapeuticsegments.Asper
AIOCD, AWACS data, its segmentwise market share in the key therapies stands
at: Respiratory (19.4%), Antiinfectives (7.0%), Cardiac (5.4%), Gynaecology
(10.1%)andGI(3.6%)inMar12.
OurView:RespiratoryandGynaecologycontribute29%and13%respectivelyto
Ciplasdomesticbusiness.TheCAGRgrowthforboththesetherapeuticsegments
isexpectedtobeover12%betweenFY10FY14E.
Exhibit10:TherapywiseBreakupofDomesticFormulations(Rs.mn)DomesticBiz(%) FY10 FY11 FY12E FY13E FY14E CAGR(%)
Respiratory 28 5,956 6,701 7,841 9,174 10,733 15.9
YoY(%) 9 13 17 17 17
AntiInfectives
19.9
4,316 4,764 5,097 5,454 5,836 7.8
YoY(%) 16 10 7 7 7
Cardiac 12.2 2,662 2,929 3,368 3,873 4,454 13.7
YoY(%) 3 10 15 15 15
Gynecological 11.8 2,284 2,826 3,334 3,834 4,410 17.9
YoY(%) 48 24 18 15 15
GastroIntestinal 7.3 1,627 1,752 1,962 2,198 2,461 10.9
YoY(%) 12 8 12 12 12
Source:Company,KarvyInstitutionalResearch
Cipla hasbeen witnessing a rampup in growth in Respiratory, Cardiac and GI
portfolio from FY10 to FY12. While high growth has been witnessed in
Gynaecologyportfoliooverlasttwoyears,intherespiratoryspacethegrowthfor
FY12hasbeenat17.8%whichishigherthanindustrygrowthof14.2%mainlyon
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CiplaLtd.
accountoftheinhalersegment.TheGynaecologysegmenthasgrownby18.2%for
FY12periodwhichishigherindustrygrowthof15.1%.
Exhibit11:KeyTherapiesSegmentRespiratory&GynaecologyReportingHigherthantheindustryGrowth(in%) Cipla Industry
SUPERGROUP %ofSales FY12 Q4FY12 Mar12 FY12 Q4FY12 Mar12
Respiratory 28 17.8 23.1 23.6 14.2 15.3 17.3
AntiInfectives 19.9 6.7 9.3 12.4 11.1 14.6 18.3
Cardiac 12.2 15.5 17.5 15.6 20.7 22.2 24.3
Gynecological 11.8 18.2 19.3 8.0 15.1 16.9 15.7
GastroIntestinal 7.3 13.3 23.1 24.2 13.3 17.3 20.0
Source:CompanyandAIOCD,KarvyInstitutionalResearch
Ciplas outperformance in Respiratory segment can be attributed to strong
performance in inhalers segment, while the Gynaecology segment has witnessed
outperformance due to the push given to the oral contraceptive market. Ciplas
brandequityintheInhalersegmenthasbeenquiteformidable,andtheCompany
is
confident
to
maintain
its
market
share
despite
more
competition
from
Sun
Pharma&Lupin.
Exhibit12:KeyProductsTherapy DomesticBusiness(%) PriceHike(%)
Seroflo Respiratory 3.7 10
Aerocort Respiratory 2.7 4
Foracort Respiratory 3.4 14
Misoprost Gynaecology 1.7 19
Source:AIOCD,KarvyInstitutionalResearch
It
is
to
be
noted
that
Cipla
has
not
taken
any
price
hike
in
MTP
segment,
while
the
CompanyisalsolaunchingproductsonaregularbasisinRespiratorysegment.
OurView:Thegrowth in the respiratoryproductswillbedrivenbypricehikes
(due toCiplas lion share in the segment),while thegrowth inGynaecology is
largelyvolumedriven.
Exhibit13:NewProductLaunchesCategoryFY11 FY10 FY09 FY08
Respiratory 5 4 3 5
Source:Company,KarvyInstitutionalResearch
ThekeyproductsintheRespiratory&Gynaecologysegmentshavewitnessedrise
inmarketshareoverthelastoneyearonMATbasis(Exhibit14).Tractionhasbeenbetter in theboth these segments for Mar12 and 3M Mar12 compared to 12M
FY12.
Our View: With all the products amongst the Top10 and rampup in new
launches,wecontinuetobelievethattheRespiratoryportfoliowillsee17%YoY
growthinnexttwoyears,whiletheGynaecologysegmentislikelytowitness12%
YoYgrowthaidedbyhigherbonuses.
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CiplaLtd.
Exhibit14:KeyProductsinRespiratory&GynaecologySegmentMATValueMarketShare(%) WithoutBonusgrowth
Brand Supergroup MATMar11 MATMar12 Q4FY12YoY(%) FY12YoY(%) Mar12YoY(%) INNLEM
CiplaTotal
Seroflo
Respiratory
3.7
3.7
16.7 11.0 15.2 NOAsthalin Respiratory 4.7 4.7 14.9 13.1 12.9 YES
Foracort Respiratory 3.0 3.4 31.8 26.1 31.4 NO
Aerocort Respiratory 2.8 2.7 11.5 12.6 13.6 YES
Budecort Respiratory 2.2 2.3 33.1 17.6 39.1 NO
MTPKit
Mtprost
Gynaecology
Gynaecology
3.2
1.6
3.7
1.7
21.2
11.0
14.0
24.1
(31.2)
24.6
YES
YES
Source:AIOCD,Company,KarvyInstitutionalResearch
Seroflo,ForacortandBudecortdontfigureinNLEMlist.OutofTop10products,
eight products belong to Respiratory & Gynaecology segment. Novamox
(Amoxycillin)CiplasoldergenerationantiinfectiveproductinTop10products
is
showing
single
digit
growth.
Exhibit15:Top10ProductsBrand Supergroup Mar12(Rsmn) FY12YoY(%)
CiplaTotal 32,897 13.3
Seroflo Respiratory 1,205 11.0
MTPKit Gynecological 1,218 14.0
Foracort Respiratory 1,110 26.1
Asthalin Respiratory 1,536 13.1
Novamox AntiInfectives 1,000 8.3
Aerocort Respiratory 903 12.6
MTPill Gynecological 776 (1.2)
Budecort Respiratory 747 17.6
Ciplox Derma 670 0.1Mtprost Gynecological 561 24.1
Source:AIOCD,AWACS
OurView:CiplaislikelytosustainhighergrowthinRespiratory&Gynaecology
segmentsowingto latentdemand,pricehikesandbonusdoleout,whileregular
productintroductionsareexpectedtoaidgrowth.ThegrowthinCAGRforthese
therapiesisexpectedtobeupwardsof12%betweenFY10FY14E.
4. FieldForce Productivity Inline With Peers Further
ImprovementisLikely
The productivity of Medical Representatives (MRs) at Cipla as on FY11 stood atRs.3.4mn/MR,whichisinlinewithLupin(Rs.3.5mn),Dr.Reddys(Rs.3.1mn)
and Cadila (Rs. 3.7 mn) exbiochem. Cipla has around 15 marketing divisions in
Indiawithnearly7,000MRs.
Exhibit16:CompanywiseMRProductivityChartMRs FY11sales(Rsmn) Productivity
SunPharma 2,900 23,801 8.2
Dr.ReddysLabs 3,800 11,690 3.1
Lupin 4,500 15,509 3.5
Cadila 4,500* 16,471 3.7
Source:
Company,
Karvy
Institutional
Research;
Note:
*ex
Biochem
Despite 45% of the revenues coming from the semiurban market, Ciplas
productivity hasbeen inline with the industry due to itsbrand value and scale.
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CiplaLtd.
Cipla has announced the closure of two marketing divisions i.e. Protec &
Omnicare with contractual MRs. It has deployed its own workforce inboth these
divisionsforwhichthenumberofMRshasrisento7,000from6,000earlier.
Exhibit17:DomesticFormulationRs.mn FY07 FY08 FY09 FY10 FY11 FY12E FY13E
MRstrength 3,000 3,300 4,600 6,000 7,000 7,000 7,000
DomesticBrandedBusiness 14,898 16,888 19,371 21,344 23,951 27,446 31,020
Newproductlaunches 14 23 31 32 28 30+ 30+
MRproductivity 4.9 5.1 4.2 3.6 3.4 3.9 4.4
Source:KarvyInstitutionalResearch,Company
OurView:Ciplahasrampedupitsfieldforceinthelasttwoyears,withclosure
of two marketing divisions having contractual MRs. With the marketing
investment completed and the contribution of new MRs, we believe that the
CompanysproductivityperMRisallsettoincreasefurther.
5. Derisked Partnership Model Renegotiations of
ExistingContractsforBetterReturn
Ciplas currently has 51% of revenues coming from its international markets. Its
export revenues rose at a CAGR of 14% in FY0711 period. As per partnership
model, the Company develops, manufactures and supplies products, while its
partnerisresponsibleforregulatoryfilings,legalandmarketingofproductsfor7
10yearsandrenewablethereafter.Ciplasexportbusinessisalowriskandstrong
cashflow generator. The Company is renegotiating products and partnerships,
whicharenotmeetingtheCompanysbenchmarkofprofitability.
Exhibit
18:Region
wise
Key
Partnerships
KeyGeographies Partners Revenues(USDmn)
US Teva,Sandoz,Watson,Akorn(22partners) 170
EU Ratiopharm,Hexal,Stada,Neolabs(60partners) 103
Africa Medpro 310
Australasia Sigma 88
MiddleEast 66
Source:Company,KarvyInstitutionalResearch
OurView:TheCompanysstrategyfor internationalmarketsandfocus togeta
better product mix would yield significant returns, going ahead. We believe
garneringstrong
market
share
in
the
launched
products
will
not
be
difficult
for
the
companygiventhestrongprofileofitspartners.
6. Regulatorycompliant Facilities With No Overhang
RenegotiationofContractsisLikely
Cipla has seventeen facilities, which havebeen certifiedby all major regulatory
agencies. Unlike its peers in the space i.e. Aurobindo Pharma, Claris, Cadila
DRL,Sun Pharma and Ranbaxy who have been pulledup by the US FDA at
variouspointsintime,Ciplahasneverfacedanyimportalertsofar.
OurView:StrongfocusonqualityhasbeenoneofthebiggeststrengthofCipla,
whichinspires
greater
confidence
in
global
generics
market.
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CiplaLtd.
7. Supply Exclusivity to Teva & Akorn to Boost
Confidence
Olanzapine & Escitalopram to Teva: Cipla has started supplying Olanzapine
(marketsize
US$3.3
bn)
and
Lexapro
(Escitalopram
with
US$2.9
bn
market
size)
to
Teva during exclusivity period. Olanzapine exclusive supplies for Teva have
begun from Nov11 and will last till Apr12. Lexapro is a CNS drug having three
playersi.e.Mylan,Tevaandtheinnovatorduringtheexclusivityperiod.
OurView: InLexapro,Cipla is likely togenerateUS$46mn revenuesduring the
exclusivityperiodbasedon60%priceerosionand40%marketshareforTeva
anda20%shareofCiplaintherevenues.WehavefactoredanEPSupsideofRs
1.1duringtheexclusivityperiodforLexapro.
Oral Vancomycin to Akorn: Cipla has also started supplying oral Vanocin
(VancomycinwithUS$328mnmarketsize)toAkorn.Itsignedanagreementwith
Akornin
Mar06,
under
which
it
would
manufacture
and
supply
Vanocin,
while
the latter will file the ANDAs and market the same afterwards. In oral Vanocin
space,therearethreeplayersi.e.StridesArcolab,AkornandWatson,andwehave
assumedstaggeredcompetitioninthisproduct.
OurView:Cipla is likely togenerateUS$20mn revenuesfromoralVanocin in
FY13E based on 50%price erosionand 30%market share.Wehavefactored in
US$9mnrevenuescominginforFY14E.
Filings of Lowcompetition Opportunities in US, Marginupside is Likely: Cipla
has DMF filings of key products with more than US$500 mn revenues, which are
expected to have less thanfive players.The Company may getbetter commercial
terms
with
their
partners
for
the
same.
Key
opportunities
expected
to
pan
out
for
theCompanyoverthenextfouryearsareasunder:
Exhibit19:OpportunitieswithDMFFilingDates&MarketSizesCY12 CY13 CY14 CY15
Rosiglitazone(Apr05)(US$680mn)Dutasteride(May09)
($972mn)
MometasoneFuroate
(Dec07)($1.2bn)Albuterol(Jun03)($1.3bn)
Lamivudine/Zidovudine(Sept08)($200mn) Fluticasone(Dec01)($855mn)
Raloxifene(Jan07)($1.3bn)
Finasteride(Sept04)($447mn)
Budesonide/Formoterol(Apr07)($2.8bn)
Source:KarvyInstitutionalResearch
OurView:Renegotiations of existing contracts ispossible in caseDMF/ANDA
filings of big products expected to pan out (can get higher margin from its
partners)&leanerhistorywiththeregulatoryagenciesofthedevelopedmarkets.
Challenges Ahead in AntiRetroviral Segment: In AntiRetroviral (ARV) space,
Cipla is amongst the largest suppliers under the WHO & PEPFAR HIV/AIDS
programwhichisgettingextensivelypricecompetitive.
Exhibit20:OneoftheBiggestPlayersinAntiRetroviralSpaceFinal/TentativeApproval
AurobindoPharma 33
Matrix 28
Cipla 23
Source:Company,KarvyInstitutionalResearch
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CiplaLtd.
Aurobindo Pharma is the major Indian player in the ARV space with the
maximumnumberoffilings.
Exhibit21:AntiRetroviralRevenueMix(US$mn) FY11 FY12E FY13E FY14E
Tender 106 106 85 68
NonTender 71 71 85 102
Source:Company,KarvyInstitutionalResearch
OurView:Ciplas revenuesfrom lowyielding tenderbusinesswilldeclinefrom
US$106mn inFY11 toUS$68mn inFY14E. It derives 13% revenuesfromARV
segment,whichislikelytodecline,asitplanstofocusonlyonprofitablebusiness.
Supply Contracts for Inhalers Likely: Cipla has the third largest inhalers
manufacturing capacity in the world. Its Management has indicated that the
Company is in talks with several global players to access to various markets and
providethembettercommercialstermsforapossiblealliance.
Our View: With expertise in inhaler manufacturing at regulatorycomplied
facilities and companys strength in drugdeliverymodes in the inhaler space,
Ciplasmarginsareexpectedtobeaccretiveforthisbusiness.
8. Launch of Combination Inhalers Exploring Low
Competition&HighMarginOpportunity
Cipla has launched four products in several EU markets, as elucidatedbelow.
Combination inhaler i.e. Seretide (from GSK with US$1.6bn marketsize in EU)
maybe launched in FY13E. Symbicort(havingUS$1.4bn marketsize inEU)may
belaunchedinnearfuture.
We have factored in the launch of a combination inhaler FY13E (full year) and
another launch in FY14E (full year). We expect revenues to grow rapidly, as the
Companyspartnerwillbeabletogarneratleast20%marketsharefromthesame,
asitisexpectedtobealowcompetitionopportunity.
ContributionofInhalersspacetogrowmorethandoubleto27%inFY14E:Cipla
istheoneofthelargestmanufacturersofinhalersglobally.TheCompanyhasbeen
abletomonetizethefollowingopportunitiesintheinhalerspace.
Exhibit22:EUProductOpportunitiesProducts Country
Budesonide Germany,Portugal
SalbutamolMDI Denmark,UK,Portugal
BeclomethasoneDipropionate Portugal
SalmeterolMDI UK,Germany,Ireland,Poland
Source:Company,KarvyInstitutionalResearch
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KeyFinancials
1.RevenuestoGrowCAGRof14%inFY11FY14EPeriod
Ciplasrevenues
have
grown
by
22.7%
during
FY07
FY11
period
on
back
of
strong
growth in its export formulations front, while the domesticbusiness recorded
12.6%CAGRgrowth.Webelievethattherevenueswouldgrowby14%CAGRin
FY1114Eperiodduetocontinuedtractionindomesticformulationsandlaunchof
combinationinhalersintheEUmarkets.
Exhibit23:Keyassumptionsforrevenues(Rs.mn) FY12E FY13E FY14E Assumptions
Domestic 32,290 36,590 41,501
GrowthinBrandedgenericat13%while
ingenericgenericat15%forFY13and
FY14.
IndoreSEZ 7,000 10,000 13,000 Rampupexpected
ARV 8,289 8,127 8,127
DegrowthinlowermarginTender
businessby20%forFY13&FY14;non
tenderbusinessreportinggrowthof20%
forFY13&FY14
Inhalers 3,980 6,562 8,648launchofonecombinationproductin
FY13andonemoreinFY14inEU
Antimalarials 4,158 5,096 6,116 Growthat20%forFY13&FY14.
Otherexport
formulations5,869 5,873 5,873
TechLicensingincome 332 240 240
Others 1,009 1,110 1,221
Totalsales 69,672 81,683 93,089
Source:Company,KarvyInstitutionalResearch
2.RisingMargins&ContributionofIndoreSEZ
Ciplas raw material expenses have declined from 45.8% in Q2FY11 to 40.7% in
Q3FY12,whileitsotherexpensesrosefrom25%inQ2FY12to26.4%inQ3FY12.Its
net material cost has declined significantly on YoY basis owing to improved
rationalization of product mix andbetter realizations in ARV space. The raw
material cost has declined from 45.5% in 9MFY11 to 40.9% in 9MFY12. Other
expenseshavebeenhigherduetoIndoreSEZ.
Exhibit24:CostAnalysis
Source:Company,KarvyInstitutionalResearch
40.7% 40.3% 42.4%47.9% 44.8% 45.8%
10.7% 10.6% 10.9%7.8% 8.7% 8.4%
26.4% 25.0% 24.2%26.2% 26.0% 23.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Q32012 Q22012 Q12012 Q42011 Q32011 Q22011
Material staffcost other
77.7 76.0 77.581.9 79.5 77.6
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3. Indore SEZ & Impact of Higher Capex on Return
Ratios&AssetTurnoverRatios
CiplahasspentRs.9bnforitsIndoreSEZ(ISEZ)facility,whichhousesfacilityfor
oral,topical
injectables
and
others.
The
compression
of
the
return
ratios
and
asset
turnover ratioshasbeenin lieu of ISEZ. Webelievethatwithimproving capacity
utilisation at the ISEZ plant, the operating leverage will aid the key profitability
ratios,goingforward.
Exhibit25:ReturnRatiosFY10 FY11 FY12E FY13E FY14E
ROCE(%) 21.5 17.2 18.8 19.0 20.3
ROE(%) 21.4 15.4 15.8 16.0 16.9
AssetT/O(x) 1.9 1.6 1.5 1.6 1.7
Source:KarvyInstitutionalResearch
4. Decline in Capex & Rise in Revenues to Boost
EBITDA
Ciplascapex,whichhasbeenhigheratRs.6.5bninFY11,willcomedowntoRs.5
bn in FY1314E due to decline in capex. The fixed cost component of ISEZ is
approximately Rs. 3.6bn. As the fixed cost component declines, the EBITDA will
improve from 20.1% in FY11 to 23.6% in FY14E. With the revenues rising to Rs.
91.86bn in FY14E (vs. Rs. 56.07bn in FY10) and slowdown in capex, we expect
that the operating leverage would come into play and EBITDA margins would
improve, going forward. It can aptly be seen that the EBDITA margins have
declinedto20.2%inFY11from23.4%inFY10.IndoreSEZcommencedcommercialoperationsinFY2011.
Exhibit26:Revenues,Capex&EBIDTA
Source:KarvyInstitutionalResearch
5.RiseinInhalerRevenuestoimproveEBITDA
CiplainhalerrevenuesarelikelytorisefromRs.3.21bninFY11toRs.8.64bnin
FY14E.Withhighergrossmarginsininhalerspace,weexpectthesametoimprove
CiplasEBDITAmargins,goingahead.
0%
5%
10%
15%
20%
25%
30%
0
20000
40000
60000
80000
100000
FY09 FY10 FY11 FY12E FY13E FY14E
Revenues Capex EBITDA
(Rsmn)
InhalersRevenues&EBIDTA
Source:KarvyInstitutionalResearch
18%
20%
22%
24%
0
5000
10000
FY11 FY12E FY13E FY14E
Inhalers EBITDA
(Rsmn)
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CiplaLtd.
Risks&Concerns
A.OverchargingIssueswithNPPA
While
the
NPPA
has
asked
Cipla
to
pay
Rs.
16.5bn
towards
overcharging
of
medicines, the Company maintains that these demands are contrary to orders of
the Supreme Court. The option value of the contingent liability on account of the
overchargingofmedicinesisRs.21.
B. Seven out of Top10 Products likely to come under
NLEMList
Ciplas Top10 products constitute 30% of its domestic portfolio. Five more
products willbe coming under NLEM list, taking the total to seven (Ciplox and
Novamox alreadyunder price control).Except for Seroflo, Asthalin and Budecort
all other products figure out in the latest NLEM list, which is expected to take
shape in the foreseeable future. The Government is yet to decide on the pricing
mechanism tobe adopted. Industry associations are mooting for marketbased
pricing mechanism while the health ministry/NGOs are pitching for a cost
based/tenderbasedpricingmodel.
Karvyvs.Consensus
Exhibit27:Karvyvs.ConsensusFY13E FY14E
(Rsmn) Karvy Consensus Karvy Consensus
Sales 81,232 79,831 91,878 89,509
EBITDA 19,025 18,641 21,920 21,263
Netprofit 13,686 13,432 15,802 15,339
EPS(Rs) 17.0 16.8 19.7 19.1
Source:Company,KarvyInstitutionalResearch
Ontherevenuefrontwearehigherthanconsensus,aswehavefactoredlaunchof
combination inhaler in FY 13E and FY 14E. We have also factored Vancomycin
revenues of USD 20 mn and USD 9 mn for FY 2013E and FY 2014E. EBDITA
margins
are
marginally
higher
than
consensus
due
to
scale
in
inhaler
revenues,
IndoreSEZandrationalizationinproductmix.
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Financials
Exhibit28:Profit&LossY/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E
Domesticsales 24,589 27,691 31,332 35,504 40,270
Exports 29,006 33,661 36,041 44,687 50,568
OperatingIncome 2,462 1,842 1,341 1,040 1,040
NetSales 56,057 63,194 68,714 81,232 91,878
RawMaterial 24,530 28,604 28,329 33,153 37,100
Staff 3,189 4,642 7,337 8,217 9,203
OthersExps 12,725 14,641 15,014 17,567 19,958
R&DExpenses 2,507 2,598 2,611 3,249 3,675
TotalExpenditure 42,951 50,485 53,291 62,146 69,897
EBITDA 13,106 12,709 15,422 19,025 21,920
EBITDAmargin(%) 23.4 20.1 22.4 23.4 23.9
Otherincome 943 1,038 1,420 1,279 1,378
Interest 230 51 134 101 130
Depreciation 1,653 2,289 2,966 3,096 3,416
ProfitBeforeTax 12,168 11,407 13,742 17,168 19,815
Tax 2,285 2,277 2,958 3,421 3,951
Effective
tax
rate
(%)
18.8 20.0 21.5 20.0 20.0NetProfit 9,883 9,130 10,784 13,686 15,802
MATCreditEntitlement (700)
DeferredTax 150 333
NetProfit 9,733 9,497 10,784 13,686 15,802
EOI 1,082 107
PATafterEOI 10,815 9,604 10,784 13,686 15,802
Source:Company,KarvyInstitutionalResearch
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CiplaLtd.
Exhibit29:BalanceSheetY/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E
Equity 1,606 1,606 1,606 1,606 1,606
Reserves 57,535 64,524 72,154 81,836 93,016
Networth 59,141 66,130 73,760 83,442 94,622
TotalLoans 51 4,414 2,213 2,827 3,663
DeferredTaxLiabilities 1,792 2,125 2,435 2,435 2,435
Liabilities 60,983 72,668 78,407 88,704 100,720
GrossBlock 28,954 39,290 44,559 49,259 54,259
Depreciation 8,843 10,610 13,576 16,672 20,088
NetBlock 20,112 28,680 30,983 32,587 34,171
Capitalworkinprogress 6,842 2,531 1,800 1,500 1,500
Investments 2,651 5,703 7,041 7,041 7,041
Inventories 15,126 18,832 17,096 19,842 22,289
Debtors 15,527 14,970 16,756 19,931 22,577
Cash 608 841 4,279 7,536 12,778
LoansandAdvances 12,216 12,689 13,231 15,506 17,564
OtherCurrentassets 47 4 16 16 16
TotalCurrentassets 43,524 47,336 51,379 62,831 75,225
Creditors 8,054 7,751 7,676 8,983 10,053
Othercurrentliabilities 4,092 3,831 5,119 6,272 7,163
Totalcurrentliabilities 12,146 11,582 12,795 15,255 17,216
Netcurrentassets 31,378 35,754 38,583 47,576 58,009
TotalAssets 60,983 72,668 78,407 88,704 100,720
Source:Company,KarvyInstitutionalResearch
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CiplaLtd.
Exhibit30:CashFlowStatementY/EMar(Rsmn) FY10 FY11 FY12E FY13E FY14E
EBIT
11,454 10,420
12,456 15,929 18,504(Inc.)/Decinworkingcapital (1,150) (4,143) 609 (5,736) (5,191)
CashFlowfromOps 10,304 6,277 13,065 10,194 13,314
Otherincome 943 1,038 1,420 1,279 1,378
Depreciation 1,653 2,289 2,966 3,096 3,416
Interestpaid() (230) (51) (134) (101) (130)
Taxpaid() (2,435) (1,910) (2,958) (3,421) (3,951)
Dividendspaid() (1,873) (2,615) (3,154) (4,003) (4,622)
DeferredTax 150 333 311
Extraordinaries 1,082 107
Cashflow
from
operations
9,595 5,467
11,515 7,043 9,406
CapitalExpenditure() (5,019) (6,545) (4,539) (4,400) (5,000)
FreeCashFlowfromOps 4,577 (1,079) 6,977 2,643 4,406
Changesinborrowing (9,352) 4,363 (2,201) 614 837
Equityissue/(Buyback) 6,691 0
Investments (1,838) (3,052) (1,338)
Cashfromfinancingactivities (4,499) 1,311 (3,539) 614 837
Openingcash 530 608 841 4,279 7,536
Closingcash 608 841 4,279 7,536 12,778
ChangeinCash 78 233 3,438 3,257 5,242
Source:Company,
Karvy
Institutional
Research
Exhibit31:KeyRatiosFY10 FY11 FY12E FY13E FY14E
EBITDAmargin(%) 23.4 20.1 22.4 23.4 23.9
NetProfitmargin(%) 17.4 15.0 15.7 16.8 17.2
DividendPayoutratio(x) 18.9 28.6 29.3 29.3 29.3
AssetT/Oratio 1.9 1.6 1.5 1.6 1.7
Netdebt:Equity(x) 0.0 0.1 0.0 0.0 0.0
RoCE(%)
21.5 17.2 18.4 20.6 21.0
RoE(%) 21.8 15.8 15.8 17.8 18.1
Source:Company,KarvyInstitutionalResearch
Exhibit32:ValuationParameterFY10 FY11 FY12E FY13E FY14E
EPS(Rs.) 12.1 11.8 13.4 17.0 19.7
P/E(x) 25.7 26.4 23.2 18.3 15.9
EV/EBITDA(x) 18.9 19.5 15.7 12.5 10.7
P/S(x)
4.7
4.1 3.7
3.1
2.8
Source:Company,KarvyInstitutionalResearch
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CiplaLtd.
Annexure
Exhibit33:ManufacturingFacilitiesNo.ofFacilities USFDA,WHO(Geneva),TGA,MHRA
Bengaluru 3.00 All
Patalganga 2.00 All
Kurkumbh 3.00 All
Goa 9.00 All
Baddi 1.00 WHO
Sikkim 1.00 None
IndoreSEZ WHO,MCC,MHRA,TGA
Source:Company,KarvyInstitutionalResearch
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ShridharIyer Head InstitutionalSales +912261844302 [email protected]
K.AnantRao Head SalesTrading&Derivatives +912261844303 [email protected]
UdayRaval KarvyInc.USA (212)2674334 [email protected]
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ShabbirDahodwala Sales(USA) +12122674334 [email protected]
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TRADING
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DEALING
BhaveshGandhi InstitutionalDealer +912261844368/69 [email protected]
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DisclosuresAppendix
Analystcertification
The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein
accurately reflecthis (their) personalview(s)about the subject security (ies) and issuer(s)and thatnopartof his (their)
compensationwas,isorwillbedirectlyor indirectlyrelatedtothespecificrecommendation(s)orviewscontained inthis
researchreport.
Disclaimer
The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information
containedherein isbasedonouranalysisanduponsourcesthatweconsiderreliable.We,however,donotvouchfor the
accuracy or the completeness thereof. This material is forpersonal information and weare not responsible for any loss
incurredbasedupon it.The investmentsdiscussedor recommended in this reportmaynotbe suitable forall investors.
Investorsmust
make
their
own
investment
decisions
based
on
their
specific
investment
objectives
and
financial
position
and
usingsuchindependentadvice,astheybelievenecessary.Whileactinguponanyinformationoranalysismentionedinthis
report,investorsmaypleasenotethatneitherKarvynorKarvyStockBrokingnoranypersonconnectedwithanyassociate
companiesofKarvyacceptsanyliabilityarisingfromtheuseofthisinformationandviewsmentionedinthisdocument.
The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above
mentionedcompaniesfromtimetotime.EveryemployeeofKarvyanditsassociatecompaniesarerequiredtodisclosetheir
individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and
investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this
recommendationhaseitherbeendisplayedorhasbeenforwardedtoclientsofKarvy.Allemployeesarefurtherrestrictedto
place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not
solicitingany
action
based
on
it.
Neither
the
information
nor
any
opinion
expressed
herein
constitutes
an
offer
or
an
invitation to make an offer, tobuy or sell any securities, or any options, futures nor other derivatives related to such
securities.
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