We downgrade Cipla to ‘neutral’ from ‘overweight’. We have increased our costs estimates materially, building in higher R&D (guided to c5% for FY15). We have also adjusted tech income lower. Our net EPS estimate declines by 14% in FY15 and 10% in FY16. We value Cipla at 20x December 2015 EPS of Rs 22 to arrive at a consolidated target price of Rs 440 (down from Rs 477).
Cipla’s Q3 miss was significant. The company reported Q3 net profit at R280 crore (down 16% y-o-y), c23% lower than HSBC estimate of R370 crore on back of higher operating expenses. Cipla has consolidated Cipla Medpro South Africa for the full period. Net sales at R2,580 crore were broadly in line, though export formulations were 7.5% above estimates. Ebitda margins at 17.2%, excluding other operating income, were below expectations on the back of higher staff and R&D expenses. Other income includes forex gain of R40 crore. Staff costs in the quarter rose 56% y-o-y to 15.8% to sales.
Even after excluding R16 crore on ESOP contribution, costs are higher by 8%. Other expenses, including R&D, are up 36% y-o-y, 14% over estimates. The company has attributed this increase to recruitment of new talent (Sameer Goyal from GSK joins as country head-India) and an increase in R&D, which is now 4.5% to sales. Full consolidation of Cipla Medpro in the quarter has also impacted margins.