Maintain BUY on Cipla - An all-round beat - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

Q2 results beat our EBITDA/PAT estimates by 8%/6%, led by a higher-than- expected revenue contribution of Covid drugs (high margin) and muted increase in other expenditure. We believe Cipla is in a sweet spot as key businesses are witnessing strong near-term growth momentum (Covid drugs in India, Albuterol in the US). While Covid sales could normalise, some portion is likely to continue in the longer term. With a recovery in ex-Covid India business and structural savings in costs, the business is poised to deliver an earnings growth of 29% CAGR over FY20-23e. Ramp-up in Albuterol/progress on IV Tramadol/limited competition launches in the US could be key catalysts in the near term. We revise our TP upwards to Rs900/sh to factor higher growth in India and lower other expenses. Maintain BUY.

Strong quarter: Revenues at Rs50.4bn was driven by strong growth across markets. While gross margin declined to 61.4% (-540bps YoY, -206bps QoQ, gSensipar in base, adverse product mix), good savings in staff cost (-100bps YoY, -150bps QoQ) and other expenses (-700bps YoY, +20bps QoQ) improved EBITDA margin to 23.4% (+265bps YoY, -80bps QoQ).

Covid drugs boosted India performance: India growth (+17% YoY) was primarily driven by 14% YoY growth in the Rx biz (Covid drugs, chronic portfolio led) & good order flow in trade generics. Covid portfolio (Remdesvir, Favipiravir, Tocilizumab) contributed ~5% of 1H revenues. Cipla believes ~1/3rd of Covid sales to sustain over a more extended period.

Our US forecast assumes ~15% market share for Albuterol by FY22: US revenues grew by 3% QoQ to USD141mn led by gProventil (~10% share in Albuterol, ~84% in gProventil) and continued traction in new launches (Esomeprazole, DHE Nasal spray, Dimethyle Fumurate). We continue to build ~15% market share in Albuterol by FY22. Management hinted towards a gradual ramp-up despite having the capacity to address ~25% market share. We forecast US revenues to grow at 10% CAGR over FY20-23e.

Key call takeaways: a) US business - 1H margins are tracking at corporate average (vs. near break-even in FY20); b) R&D spends to be at 6-7%; c) India- Ex-Covid, growth was is in line with market; d) gAdvair and other inhalation assets - progressing well; e) Goa plant - awaiting FDA response.

Maintain BUY; risks: We raise our earnings forecast by 7%/4%/7% for FY21-23 to factor in higher growth in India & lower other expenses. Our TP of Rs900 is based on 23x Sept'22e EPS & Rs30/share for gAdvair. Downside risks: lower-than-expected growth in India, slower ramp-up in Albuterol, delay in resolution of Goa warning letter, higher price erosion in the US.

Shares of CIPLA LTD. was last trading in BSE at Rs.762.6 as compared to the previous close of Rs. 789.9. The total number of shares traded during the day was 504082 in over 11338 trades.

The stock hit an intraday high of Rs. 805 and intraday low of 752.4. The net turnover during the day was Rs. 389451239.

Source : Equity Bulls

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