>CIPLA (MOTILAL OSWAL)

Cipla's 4QFY10 performance was disappointing. Key highlights are:
■ Net sales grew 3.3% YoY to Rs13.7b (v/s our estimate of Rs14.6b), EBITDA declined 6% YoY to Rs2.8b (v/s our estimate of Rs4.1b) and PAT declined 18% YoY to Rs2.1b (v/s our estimate of Rs3b). Revenue growth was lower than we had estimated due to lower than expected growth for domestic formulations, INR appreciation against the US$ and the management's conscious decision of not participating in some of the non-remunerative ARV tenders.

■ EBITDA margin declined 200bp to 20.4% as against our estimate of 28% mainly due to lower than expected topline growth, significant drop in OOI (which directly adds to EBITDA) and higher than expected staff and other expenses.

■ Reported PAT grew 6% YoY to Rs2.8b despite weak operational performance due to one-time income of Rs950m from sale of the I-Pill brand to Piramal Healthcare. Adjusted PAT, however, declined 18% YoY to Rs2.1b.

We believe that Cipla has one of the strongest generics pipelines among Indian companies. After a long delay, we believe Cipla's CFC-free inhaler pipeline is likely to gradually get commercialized in Europe and upsides from high-margin opportunities like Seretide could come through over the next two years (our estimates do not include these upsides). Its large manufacturing infrastructure, strong chemistry skills and huge inhaler capacity make it a partner of choice for global MNCs that are ramping up their generics and emerging market presence. This coupled with its low-risk strategy and one of the strongest capex in the company's history should ensure good long-term potential. Temporary slow-down in overall growth, US FDA compliance and increasing working capital requirements remain our key concerns for the company. We expect Cipla to record EPS of Rs14.6 for FY11 and Rs17.4 for FY12, translating into 17% CAGR for FY10- 12. The stock quotes at 22x FY11E and 18.3x FY12E earnings. We have lowered our target price to Rs350 (20x FY12E EPS). We maintain Buy.

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