Cipla’s Q1FY18 revenue fell 3% y-o-y due to 13% dip in India business, where GST-led inventory destocking impacted revenue. Despite launching 24 products over the past 5 quarters and low base, US business maintained the $100 million per quarter run rate. However, despite challenges, EBITDA margin jumped 160 bps y-o-y to 18% due to one-off benefits (150 bps) in material cost and dip in R&D spend. Key FY18/FY19 launches like gVidaza, gDacogen and gRenvela are losing sheen as competition has already started building up earlier than expected. The stock’s rich valuation of 20.1x FY19E factors in the optimism, but not the challenging macro environment. Hence, maintain ‘hold’.
Revenue declined 3% y-o-y due to 13% fall in India business (36%) on account of channel destocking in anticipation of GST. Emerging markets, 21%, declined 7% y-o-y/10% q-o-q. While South Africa’s performance was good (10% CC growth), US remained flat for the fifth consecutive quarter at ~$ 100 million despite 24 new launches during this period. Owing to some one-off inventory related benefits, margin jumped 150 bps during the quarter. Other income included one-off gain on sale of animal health business in South Africa of `1.18 billion.
Cipla has guided for a few limited competition launches like gVidaza, gDacogen and gRenvela in the US market in FY18/19. However, competition has started building up – five players have already launched gVidaza and four players gDacogen, and have become totally commoditised. Aurobindo has launched gRenvela and 3/4 more players are expected in next two quarters as all are sourcing the API from Strides. Cipla’s R&D cost is poised to inch up as clinical trial for Advair kicks-off in FY18. In the medium term, products like Nanopaclitaxel and Albuterol MDI (TAD for end FY18) will be critical.
Some of Cipla’s most important investments in the past three years continue to face structural pressures – US, competitive pressure & price erosion and emerging markets, forex volatility, price decline in the Middle East and rising competition. Moreover, the stock’s rich valuation of 20.1x FY19E factors in the optimism, but not the challenging macro environment.