>CIPLA LIMITED (INDIABULLS)

Domestic revenue to remain robust; but exports may be under threat In Q4’09, Cipla posted a 21.8% yoy growth in sales to Rs. 13.7 bn, delivering in-line domestic growth and lower than - expected growth in exports. The Company’s EBITDA margin improved to 25.5%, up 748 bps yoy, gaining from lower material costs and favourable exchange rate. The net profit increased by 40.9% yoy to Rs. 2.5 bn and the net profit margin expanded by 251 bps yoy to 18.5%. We value Cipla based on DCF valuation, which gives a fair value of Rs. 246. Although, in our view, domestic revenues are likely to remain robust, exports may come under threat due to FDA deviations. Thus, we downgrade the stock to Hold.

Robust growth in domestic revenue: We project stable expansion of Cipla’s domestic revenues, which forms 45% of the Company’s gross sales, supported by strong domestic demand for generic drugs as customers are attracted towards cheaper alternatives for expensive innovator drugs. A robust demand offtake coupled with Cipla’s market leadership position lend support to our
upward revision of estimates for growth of domestic sales by 0.5% to 15% in FY10 and 14% in FY11.

However, exports at risk from FDA deviations and Cipla Medpro takeover: We expect Cipla’s exports to come under threat if the Company fails to rectify or comply with the nine deviations pointed by USFDA in its manufacturing processes at the Bangalore plant. Thus, non-compliance would put 27% of Cipla’s total sales at risk - Cipla draws 10% of its total sales from US and 17% from sales of anti-AIDS drugs in Africa under the President's Emergency Plan for AIDS Relief (PEPFAR) which requires USFDA approval. Furthermore, Cipla’s 20-year supply arrangement with Cipla MedPro in South Africa, which contributes 7% of total exports, may be impacted due to built-in marketing and sourcing conflicts if the latter is acquired by Adcock.

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