We maintain a 'buy' rating on Cipla with a target price of R495 per share, valuing the stock at 20x September FY15e EPS. Currently, the stock is trading at 17x FY15e EPS, at a discount to its peers due to margin risk as Cipla scales up operations in the year of transformation. We believe while improved visibility on domestic growth and increasing traction in exports will render healthy growth, rising overheads from series of hiring at the senior level and R&D pipeline are investments for long-term growth, which will render higher RoCEs.
Cipla has received approval to sell Levabuterol HCL inhalation solution, the generic version of Xopenex inhalation solution. The drug’s total market size is $315 million and there are four generic players — Teva, Mylan, Actavis and Dey Pharma. We expect the company to garner $5-6 million sales assuming 80% price erosion and 10% market share. Cipla has a pipeline of 35 pending approvals including six own ANDAs and it has taken back 20 ANDAs from partners to ramp up its presence in the US. We expect the US to be a critical market for growth over the next two to three years, after India and South Africa, as the company ramps up its own filings there.
We are positive on Cipla’s focus and aggression on reviving growth by consolidating its front-end presence in crucial markets. This strategy will be margin accretive as it churns business from partnerships to the company’s own books. Better execution in domestic market and scale up in niche opportunities such as Dymista and inhalers (six launched in EU) are near-term growth drivers. Moreover, better-than-expected scale up in Medpro adds an upside risk to our estimates.