Cipla - Solid beat; rebasing itself - ICICI Securities

Cipla reported strong Q2FY21 performance across the parameters with beat of 10/28/38% on revenue/EBITDA/PAT. Further, the growth in most of the markets was above estimate. We believe the company is successfully recreating new trajectory of outperforming growth in India vs underperformance over the past few years and margin level of 22-23% vs 17-19% in the past. Consolidated revenues grew 14.6% to Rs50.4bn (I-Sec: Rs45.9bn), EBITDA margin was up 270bps to 23.4% and adjusted PAT grew 41.2% to Rs6.7bn (I-Sec: Rs4.8bn). This beat was driven by strong growth in India and South Africa as well as significant operational cost savings. However, gross margin was down 200bps QoQ due to changed revenue mix including contribution from COVID-19 related products which have lower gross margin. Upgrade to BUY with a revised target price of Rs910.

- Strong growth across geographies: India business grew 16.8% YoY with 28.0% growth in the trade generic sales and 14.0% increase in branded business led by respiratory, cardiovascular and urology. Renewed focus on India with launch of COVID-19 related drugs and in-licensed brands would help in sustaining the strong growth. COVID-19 portfolio contributed ~5% of total sales. US revenues stood at US$141mn, up 4.4% QoQ driven by generic Albuterol. Sales in emerging markets was flat in constant currency terms and supplies of Remdesivir has started in several markets. South Africa (incl. Global Access) business grew 19.0% in in constant currency terms.

- Cost control benefits to sustain: EBITDA margin improved 270bps YoY to 23.4% led by higher revenue and reduction in S,G&A expenses. We believe this margin expansion is partially sustainable, driven by cost control initiatives. However, gross margin was below estimate due to change in revenue mix with contribution of COVID-19 portfolio. We expect EBITDA margin to improve 380bps over FY20-FY23E to 22.8% with improving revenue mix and cost control.

- Outlook: We expect revenue/EBITDA/adj. PAT CAGR of 9.9/16.6/23.9% over FY20-FY23E with EBITDA margin improving 380bps. The company turned net cash in H1FY21 and FCF generation of ~Rs20bn/year over the next three years would further strengthen the balance sheet. We are positive on management's renewed focus on India business, cost control initiatives and focus on RoCE. We expect post tax RoIC to improve to 16.6% in FY23E from 9.4% in FY20.

- Valuation and risks: We raise FY21-FY23 earnings estimates by 8-9%, to factor-in higher India sales and better margin profile (~100bps). We also raise target P/E(x) to 26x from 25x considering increasing proportion of India sales, improving margin profile and strengthening balance sheet. We upgrade the stock to BUY with a revised target price of Rs910/share based on 26xSep'22E earnings (earlier: Rs805/share based on 25xSep'22E). Key downside risks: Regulatory hurdles, forex fluctuations and lower growth in India market.

Shares of CIPLA LTD. was last trading in BSE at Rs.746.25 as compared to the previous close of Rs. 744.5. The total number of shares traded during the day was 51582 in over 1584 trades.

The stock hit an intraday high of Rs. 750 and intraday low of 743.9. The net turnover during the day was Rs. 38525490.

Source : Equity Bulls

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