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Exit Cipla – Citi Research

August 25, 2007

Citigroup Research has recommended an Exit on India’s premier pharmaceuticals company Cipla. Citi’s target price is Rs 191 a modest 11% over CMP of Rs 171.

Cipla indicated that its PAT may be lower in FY08 due to rupee appreciation, higher cost of imports from China and pricing pressures. Cipla plans to incur capex of around Rs9.5bn over FY08-09 primarily on its facilities in Sikkim, Goa and Indore. With profitability under pressure this will take a heavy toll on return ratios.

Guidance of 10-12% sales growth and lower profits in FY08; tie up for 125 products across 10 partners in the US/ 94 ANDAs filed and expects to file 20-25 in FY08. Cipla is a steadily growing company, thus P/E based valuation is the right tool for the company. Target price of Rs191 is based on 20x June 08E earnings. Historically, the stock has traded at 15-30x forward earnings. Although Cipla is an Indian pharma major, Citi believe it should trade at a marginal discount to peers in the sector, justified by the lower value addition to the business.

Update on Aug-29th:
Citi has downgraded the target price of Cipla to Rs 165 and also revised EPS estimates for FY08 to Rs 7.93 a fall of 7.7%.

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