Dalal Street Investments

Book Profits in Cipla – Citi + Merill

January 25, 2008

Cipla’s 3Q net income (Rs2.1bn; 14% growth YoY) came in 8% ahead of consensus estimates driven by a significant 192% rise in technology income (Rs748mn vs. estimates of Rs450mn) which resulted in a 23.7% EBITDA margin for 3Q (vs. estimates 22%). Excluding technology income, Cipla’s EBITDA margin was sharply lower to 18% (from 23% on YoY basis).

Merill estimates 13.5% EPS CAGR (FY08-FY10E) for Cipla vs. over 20%+ sector EPS CAGR (FY08-10E). Cipla trades at 20.1x FY08E and 17.4x FY09E earnings, a +20% premium to its industry peers. On the back of uncertainty on sustainability of technology income, potential for margin improvement and lack of big ticket product visibility, Merill & Citi maintain a SELL recommendation on the stock.

We recommend not to short, however, if you hold the stock you may exit and BUY some other Pharma company.


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