Fundamental Analysis And Intrinsic Value of Cipla Ltd.
Dated: 26 Mar 23
Company: Cipla Ltd.
CMP: Rs. 877.25
Introduction
In this article we will try to analyze Cipla Ltd. Based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.
Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.
Leverage Ratios
Observations:
- All the above ratios show that the company has reduced its debts almost to nil.
- All ratios are in sync and indicate the deliberate attempt of the management to make the company debt free.
Operating Ratios
Observations:
- All ratios have shown improvement during the period in consideration except working capital turnover ratio. This is indicative that though the revenue of the company is increasing it is taking more working capital than before. in other words, company has to utilize its working capital more efficiently.
- Of all the ratios Total Asset turnover ratio is significantly low indicating that the company has under utlilised and or unutilised assets.
Profitability Ratios
Observations:
- All the above ratios have shown improvement during the period. Only EBITDA margins have not improved much when compared to other ratios.
- It is to be noted that PAT margins have shown a better improvement over EBITDA margins.
Intrinsic Value
Assumptions:
- The increase in cash flow is assumed to be Rs. 220.59 Crores for the first five years and then Rs 110.30 Crores from sixth to tenth year. The growth rate is projected based on the past Free Cash Flows (refer to figure below). In the past free cash flow has increased at the rate of Rs. 441.19 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Terminal growth rate is assumed to be 0%.
- Discount rate is assumed to be 12%.
- Free Cash Flow is extrapolated with the base value as Rs 1300 Crores which is same as 2017 and 2019 levels. The average of free cash flows for the previous years is Rs. 1969.50 Crores.
- Increase in Revenue is assumed to be Rs.574.48 Crores per year for the first five years and then Rs 287.24 Crores per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 1148.95 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Free cash flow will be 11% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.11. Here we assume that the same average will hold good for future.
Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.
Revenue Growth Model
Intrinsic Value: Rs. 269.25
Stock Entry price with 25% margin of safety: Rs.201.94
Free Cash Flow Growth Model
Intrinsic Value: Rs.252.25
Stock Entry price with 25% margin of safety: Rs.189.19
The average of the above two stock entry prices works out to be Rs.195.56. When the stock starts trading below this price it becomes attractive for long term investment.
Author
Jibu Dharmapalan
Fundamental Analyst
Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.
References:
https://www.nseindia.com/get-quotes/equity?symbol=CIPLA
More about the Company:
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