Nomura lowers Cipla’s rating on high valuation, earnings concerns

MUMBAI: Brokerage Nomura has downgraded its rating for Cipla to ‘Reduce’ from ‘Neutral’, citing expensive valuations and limited upside earnings prospects in the near term. The brokerage said the stock is trading at 30-45% premium to its peers. Nomura is the first to downgrade Cipla among the 17 brokerages that have rated the stock this month.

Nomura has set a price target of Rs 569 for the stock, implying 9% potential downside from the Thursday’s closing price of Rs 622. “Cipla’s stock has increased 64% since May 31 2014 versus the Sensex return of 11%. The stock trades at 35.7x FY15F and 26x FY16F EPS of Rs 17.65 and Rs 24.27, respectively, a 30-45% premium to peers,” Nomura said in a report.

The rich valuation is due to market expectations of a significant increase in earnings in the near term and longer-term prospects beyond FY17F, it said. “We do not look for any significant increase in earnings in the near term. We expect Cipla’s business mix to change gradually and, hence, we do not anticipate a substantial increase in gross margins,” said the report.

The brokerage doesn’t expect revenue composition to change significantly, and a rise in R&D spend should result in limited EBITDA margin expansion. It believes investor expectation from Cipla’s inhaler franchise has risen after the recent launch of Seretide MDI in select EU markets. The approval is a positive development, but approvals for other high-value inhalers in the EU and the US still face significant regulatory challenges.

It said over the past five years, employee costs have significantly increased for Cipla (more than 4 times over last 4 years) and are now ahead of Lupin.