Cipla reported results in line with expectation. The key positive was the strong growth in India and US business. Margins also came 70 bps better than expected despite higher R&D. Management indicated that it expects to file first MDI respirator in US in Q3FY17. We expect margin improvement going forward to be slower. Retain Hold.
Results meet expectation
Cipla reported results in line with expectation. Revenues were 1% and margins 70 bps ahead of expectation. Higher depreciation due to Invagen led to reported net profit in line with expectation.
India sees strong growth
The key positive was the strong growth in India business at 21% after a weak Q1. US business revenues, up 38%, were in line with our expectation while EM was better than expected. South Africa revenue grew 8% in constant currency. The key negative was the sharp fall in Europe and API business, down 27% and 50%.
Margins improve led by cost optimisation
The key positive in the results was the 100 bps q-o-q margin improvement despite 140 bps increase in R&D. This was led by (i) better gross margins led by mix and (ii) cost optimisation. Management indicated that ex Invagen, employee cost increased only 7% y-o-y. Cipla has shifted to partnership model in EU and part of the benefit is yet to reflect in numbers.
Management indicated that pricing pressure in US is in high single digits. Additionally, clinical trials for DPI inhalers are still some time away. There is no update on gSeretide launch in UK. Positively, though the company expects to file its first Meter Dosage Inhaler (MDI) in US in Q3FY17.
Margin improvement from here to be slow
With most of the cost benefits in numbers, margin improvement from here would depend on topline growth. We expect margin improvement to be slower going forward led by pricing pressure in US, currency impact in EMs and high R&D. We expect 100 bps by FY18 over 1HFY17.
We adjust our estimates for the quarter and higher depreciation and lower tax rate. Our FY17-18 EPS changes by 4/-2%. While Cipla will likely report strong growth from low FY16 base, significant turnaround will take time. The stock trading at 21.5x FY18 PE, is at a 7% premium to sector. We retain our Hold rating and target price of R530. Risks: Launch of key products in US/UK.
Management expects c15 launches in US including 4-5 limited competition products. India business grew 21% led by 16% growth in Rx business. Cipla has 59 pending filing in US. Additionally another 24 are TA. It filed 12ANDAs in 1H vs 5 in FY16. The key filing in the quarter was nano paclitaxel. It expects to file Albuterol MDI in Q3FY17. The Goa plant was inspected in Q2 and had 4 observations across 3 facilities. The quarter included R650m of intangible amortisation related to Invagen. Invagen sales in Q2 was $50m. Debt to equity stands at 0.25x. Long-term debt stands at $532m. Working capital loans were at $135m. Outstanding forward contracts as a hedge for receivables as on 30 September was $32m and ZAR 428m. It expects tax rate to be between 19-21%.
Cipla is the second-largest pharmaceutical company in India in terms of retail sales. Cipla manufactures an extensive range of pharmaceutical & personal care products and has presence in over 170 countries. It offers prescription drugs for all kinds of ailments as well as over-the-counter drugs for colds, oral hygiene, and skin care.