>CIPLA (MOTILAL OSWAL)

We believe that Cipla has several potential growth triggers. It is well positioned to capitalize on these future growth opportunities emanating from a strong generics pipeline, upsides from potential MNC contracts and CFC-free inhalers.

■ Strong generics pipeline: In the US, Cipla has entered into partnerships for 118 products with about 21 partners. A major portion of pipeline is yet to be commercialized, with only 23 products launched by its partners in the US.

■ Potential MNC contracts can upgrade earnings: Cipla has indicated that it is negotiating with MNCs like Pfizer, GSK, and Boehringer for long-term supply agreements. Generally, such deals span across many products and multiple markets. These potential contracts are likely to raise earnings for FY11/12.

■ CFC-free inhalers remain key long-term trigger: Cipla has the third-largest inhaler capacity globally and can become a key supplier to both MNCs/generics companies. Launch of CFC-free inhalers in EU and the US remains as a key long-term trigger for the company, which is developing nine different inhalers. While the visibility on the launch of these inhalers remains poor, we believe that some of these inhalers are likely to be commercialized in FY11. Our estimates do not include the upsides from these supplies.

■ Large underutilized capacities: The company plans for a capex of Rs10b-12b over FY10-11 post the aggressive capex of about Rs20b for setting up new EoUs and SEZ over the past 4 years. We note that this is one of the strongest capex in the company’s history. This has resulted in large underutilized capacities positioning the company strongly for driving future growth at minimal capex.

We expect Cipla to record EPS of Rs13.8 for FY10 (up 38% on a low base), Rs17 for FY11 (up 23%) and Rs20 for FY12 (up 17%) resulting in 26% EPS CAGR over FY09-12, despite potential rupee appreciation vis-à-vis the US dollar. We expect a gradual improvement in Cipla’s return ratios, as asset utilization ramps up post the large capex of the past few years. The stock quotes at 24.0x FY10E, 19.4x FY11E and 16.6x FY12E earnings. We reiterate Buy with a target price of Rs400 (20x FY12E EPS).

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