Cipla - Positive surprise continues - ICICI Securities

Cipla reported strong Q3FY21 performance across the parameters with beat of 8/22/39% on revenue/EBITDA/PAT. We believe the company has successfully recreated new trajectory of outperforming growth in India and margin level of 22-23% vs 17-19% in the past. Consolidated revenues grew 18.2% to Rs51.7bn (I-Sec: Rs48.0bn), EBITDA margin was up 530bps to 23.8% and adjusted PAT grew 94.1% to Rs7.5bn (I-Sec: Rs5.4bn). This beat was driven by strong growth in India and South Africa as well as significant operational cost control. However, gross margin was down 220bps YoY due to changed revenue mix including contribution from COVID-19 related products which have lower gross margin. The company is already net cash now and FCF generation would be healthy. Reiterate BUY.

- Strong growth across geographies: India business grew 21.6% YoY with 25.0% growth in the branded business led by respiratory, chronic segments and COVID-19 related drugs and 7.0% increase in trade generics segment. We expect growth may moderate in FY22E due to reducing sales of COVID-19 related drugs which now contributes lower than 5% of sales which was seen in H1FY21. However, base business would grow in double digit. US revenues stood flat QoQ at US$141mn despite strong traction in generic Albuterol as it was impacted by recalls during the quarter. Sales in emerging markets grew strong at 51.1% led by strong demand across countries. South Africa (incl. Global Access) business grew 6.0% in US$ terms but remained flat in constant currency terms.

- Cost control initiatives paying off: EBITDA margin improved 530bps YoY to 23.8% led by higher revenue and reduction in S,G&A and R&D 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 9.6/16.3/24.1% over FY20-FY23E with EBITDA margin improving 380bps. The company turned net cash in FY21 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 16.5% in FY23E from 9.4% in FY20.

- Valuation and risks: We raise FY21-FY23 earnings estimates by 1-13%, to factor-in strong 9MFY21, higher India sales and better margin profile. We remain positive on the stock considering increasing proportion of India sales, improving margin profile and strengthening balance sheet. We reiterate BUY with a revised target price of Rs966/share based on 25xFY23E earnings and Rs28/share for Revlimid (earlier: Rs938/share). Key downside risks: Regulatory hurdles, forex fluctuations and lower growth in India market.

Shares of CIPLA LTD. was last trading in BSE at Rs.825.6 as compared to the previous close of Rs. 841.55. The total number of shares traded during the day was 212660 in over 5687 trades.

The stock hit an intraday high of Rs. 850.05 and intraday low of 821.15. The net turnover during the day was Rs. 177896345.

Source : Equity Bulls

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