We reinitiate our coverage on Cipla with a 'buy' rating and target Rs 600. Stripping out the respiratory portfolio, Cipla trades at ~15x FY16e P/E, a steep discount to frontline peers, thereby, presenting favorable risk-reward. We value Cipla’s base business at Rs 450 or ~18x FY16e EPS of Rs 25. We value the inhaler franchise at Rs 131 per share, taking into account explicit opportunities that Cipla is likely to target over the next few years, with Dymista adding another Rs 23 per share, which gives us our target price.
Since January 2012, Cipla underperformed the BSE Healthcare Index by ~65%, led by six quarters of successive downgrades. Ebitda margins contracted from a stable 22-24% in FY12 to a nadir of 16.3% in Q4FY14, even as the management acted to correct inherent flaws in its partnering business model in the regulated markets. These included de-risking of critical geographies through distributor acquisitions/front-end build-outs, induction of professional top management and strengthening of senior management in these markets, and most importantly, a scale-up in R&D efforts to accelerate the respiratory pipeline and address the portfolio issue in the US. Limited success in the first phase of mono-therapy ICS and LABA pMDI launches in the EU compounded pessimism on the Street with increasing skepticism of the company’s competitive advantages in respiratory generics.