Mixed set of results, no near term triggers Cipla’s Q1FY12 results were a mixed bag. While growth on the sales front was disappointing in spite of increasing contribution from Indore SEZ, OPM surprised on the positive side on back of better product mix and break-even at Indore SEZ. The company has maintained its sales growth guidance of 10% and expects OPM to sustain at current levels for FY12.

We have valued the stock at 22x Sept ’12E earnings and continue to maintain HOLD rating with a target price of Rs313 as most of the positives are priced in. The key long term trigger for the stock going ahead would be approval of combination inhalers in EU.

Sales growth muted Cipla reported sales of Rs15.5bn up 8.6% YoY which was below our expectation of Rs16.6bn on back of lower traction in the export segment. While the domestic sales grew primarily in-line at 10.1% YoY driven by chronic segment, the export segment grew by mere 8.4% YoY in spite of increasing contribution from Indore SEZ. The company attributed the slower pace of growth to the export formulation segment which was impacted by lower contribution from low-margin ARV segment. ARV formulation constituted 22% of exports during the quarter as against 30% in Q1FY11. However, export API segment grew by strong 22.2% during the quarter driven by a few key product launches.

Margins surprise on back of better product mix and breakeven at Indore SEZ The Company reported OPM of 23.2% which was higher than our expectation of 20.9% on back of better product mix and break-even at the Indore SEZ. Lower contribution from ARV formulation and traction in the API segment led to improvement in gross margins. Further, the company stated that Indore SEZ has turned marginally profitable during the quarter.

Outlook and Valuation We now expect net sales and earnings to clock CAGR of 14.8% and 13.5% respectively over FY11-13E. We have valued the stock at 22x Sept ’12E earnings and continue to maintain HOLD rating with a target price of Rs313 as most of the positives are priced in. The key long term trigger for the stock going ahead would be approval of combination inhalers in EU.