Cipla - Disappointing results; maintain Sell

Cipla's 3QFY10 results were below our estimates. Revenue grew 8% yoy to `15.5bn (vs. our estimate of Rs15.8bn). However, adjusted net profit dropped 24.7% yoy due to a 760-bps fall in EBITDA margin and a high depreciation charge on the Indore SEZ plant commercialization.

n        Muted revenue growth. As expected, revenue growth remained single digit, at a muted 8% yoy. The growth was driven by 11.3% growth in domestic formulations and 11.9% growth in the exports segment. Technical fee was lower, at Rs151m due to a high base.

n        Margin pressure persists. EBITDA margin remained under pressure and slid 760bps yoy to 20.5%. The decline stemmed chiefly from the rupee appreciation, higher operating expenses at Indore SEZ plant and lower technical fees.

n        Outlook. We expect the growth to remain in the 10-12% yoy range for the next few quarters, as pick-up in revenue from the Indore SEZ would be witnessed gradually, post the USFDA approval. We believe that margin would revive to 23-24% as contribution starts from Indore SEZ.

n        Valuation and risk. At current market price, Cipla trades at stretched valuation of 21x FY12e and 19x FY13e earnings.