CIPLA– Market Perform, Cipla’s bid for Cipla Medpro – Valuation Reasonable, No Strategic Benefit

Date: 2015-07

“We view Cipla’s bid for 51% stake in Cipla Medpro (CM) at $220m more as a step to salvage its South African business, than as a growth driver. We do not disagree that this deal, valued at 9.4x EV/EBITDA, is EPS accretive and comes at a reasonable valuation. However, given that CM was left in lurch post the controversial exit of its CEO (Jerome Smith), Cipla is almost compelled to buy a controlling stake. In such a situation, a demand for higher price from Cipla Medpro’s current share holders may not be ruled out as the bid is being reviewed. CM trading at a discount to peers like Aspen and Adcock (largely due to concerns of supply agreement with Cipla post Jerome’s exit), is a boon for Cipla.
With Cipla generating 9% of sales from supply to CM and CM owing all the brands in South Africa, this acquisition also highlights Cipla’s weak business model with little focus on front end. Jerome’s re-instatement as CEO post Cipla’s acquisition cannot be ruled out given his strong relationship with Cipla management.
We reiterate our Market Perform on Cipla with a target price of Rs.360”

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