CIPLA LTD.

Cipla Ltd is one of the leading pharmaceutical companies in India, incorporated in the year 1935, founded by Khwaja Abdul Hamied. In the same year on Aug 17, Cipla was registered as a public limited company with an authorized capital of Rs 6 lakh. The company focuses on development of new formulations and has a wide range of pharmaceutical products. Cipla has over 1500 products in 65 therapeutic categories available in over 50 dosage forms.

Cipla Ltd - Investment Summary

• A pioneer in API manufacturing in India.

• Research & Development (R&D).

• Sales Increased in North America

• Recent approvals are increasing the investor's interest.

• The company’s fundamentals are strong.

Cipla Ltd - Financial Summary

Outlook and Valuation

Cipla’s Q2FY19 results were weaker-than-expected, there was a fall of 11% YoY in its net profit for the second quarter at Rs 377 crore when compared to last year, and operating margins was also low by 2.2%, mainly due to high base of restocking in the domestic market and a fall in the tender opportunity in South Africa and other emerging markets. Some of their tender businesses are growing 40% lower than last year. But company’s fundamentals are good and they are focusing more into new products. They have invested in R&D about 8.5% of their revenue to improve their product quality and this will show results in 3rd & 4th quarter. Considering all factors, we recommend to buy this stock for long term.

Management Profile

Cipla Ltd - Company Overview

Cipla, a global pharmaceutical company, offers active pharmaceutical ingredients and formulations in various therapeutic areas such as women’s health, cardiovascular, children’s health, dermatology and cosmeceuticals, diabetes, HIV-AIDS, oncology, infectious diseases and critical care, malaria, neurosciences, ophthalmology, osteoporosis, respiratory, and urology. The company is focused on agile and sustainable growth, complex generics, and deepening portfolio in Indian markets, South Africa, North America, and key regulated and emerging markets. Cipla is ranked 3d largest in pharma in India, 3rd largest in the pharma private market in South Africa, and is among the most dispensed generic players in the US.

The company develops and manufactures more than 200 generic active Pharmaceutical Ingredients used in making finished drugs. Cipla makes APIs for more than 300 partners around the world. The company is continuously adding to its development pipeline to expand its reach across key therapeutic segments.

The company’s revenue from domestic market stood at 41%. The SAGA region which includes South Africa, Sub-Saharan Africa, and Cipla Global Access businesses declined 25% year-on-year in quarter 2 when reported in US dollars, largely behind the rebasing of the CGA business and the slower offtake in Sub-Saharan Africa and the lower tender sales in South Africa. As per YTD August IMS data, Cipla became the third largest pharma company in the South Africa private market with the 6.3% share.

Europe business declined by 14% on a year-on-year basis during the quarter, largely behind supply issues related to certain products and milestone payments in the previous year on account of the FPSM launch. But North America showed a rapid growth for this quarter, increased to 19% which is 2% higher than last year.

Key Ratios

Investment Rationale

• A pioneer in API manufacturing in India.

  Cipla is a pioneer in API manufacturing in India for over 5 decades. Currently the company manufactures more than 200 generic and complex APIs. Cipla Active Pharmaceutical Ingredients (APIs) covers a broad spectrum of therapeutic categories that are supplied to some of the major formulation players in the pharmaceutical industry globally, over 350 Drug Master Files and 70 Certificate of suitability of Monographs of the European Pharmacopoeia. In addition to that, the firm also has a robust pipeline of over 50 APIs at various stages of development and has become one of the top Indian pharmaceutical companies.

• Sales Increased in North America

  Cipla’s North America business delivered sales of 108 million, growing 12% year-on-year (YoY). As alluded to in earlier call, the US business is undergoing a change in mix as designed with the B2B business coming down sharply as no new products are getting added and the portfolio rationalization that they had initiated. These are impacting the reported sales for the US business as the new DTM product sales increase which is 40% of the Q2 DTM revenues which were on Nov 05, 2018 contributed by new products launched in the last 12 months. This has helped the company to drive significant margin improvement in our DTM business in line with our internal estimates.

• Research & Development (R&D)

  The company has increased its investment in R&D at 8% (INR 316cr) versus approximately 6.5% in the previous year. They are continuing to invest in their quality systems and maintaining a strong state of control and compliance at their plants. The Company has been investing towards building a strong internal pipeline for the future. The absolute investment is marginally below last year on reported basis due to Company’s decision to discontinue its investment in CiplaBioTec. Considering this, the absolute investment is in line with the expectations and will drive focus on developing complex and high-value products. In the past two years, Cipla has stepped up R&D investments targeting the US, with several assets such as gAdvair, gProventil and gAbraxane in the pipeline.

• Recent approvals have increasing the investors’ interest.

  Recently, Cipla has received final approval for its abbreviated new drug application for Valganciclovir tablets 450mg from the United States Food and Drug Administration. Valganciclovir Tablets 450mg is AB-rated generic therapeutic equivalent version of Roche’s Valcyte. This news impacted positively a