Cipla’s sales for the quarter were largely in line with our estimates. However, it delivered a strong beat on earnings owing to significant reduction in opex. COVID-19-led disruption has enthused the company to re-imagine the business, to sustain cost saving and enhance resource productivity.

We raise our EPS estimates by 19%/14% for FY21/FY22 to factor in above-market growth in Trade Generics (Gx), ramp-up in Albuterol Sulfate sales, and cost saving benefits. We raise our price target to Rs 790 as we roll out our price target on a 22x 12M forward basis. Maintain Neutral, as the valuation factors in potential upside in earnings over the medium term.

Highest Ebitda margin in the past 20 quarters: Cipla’s Q1FY21 revenues were up 9% y-o-y at Rs 43.5 bn. Domestic sales grew to Rs 16.1 bn (+16% y-o-y). Branded Formulations sales in India were up by 9% on a y-o-y basis and Trade Generics by a strong 46% y-o-y. SAGA (South Africa Global Access) revenue grew 10% y-o-y to Rs 7.6 bn. Emerging Markets (EM) sales rose 64% y-o-y to Rs 4.6 bn. EU sales grew 19% y-o-y to Rs 2.4 bn. North America sales were down 9% y-o-y to Rs 10 bn ($135 m) on the high base of the past year.

Gross margin decreased by ~630bp y-o-y to 63.4%, attributed to a change in the product mix. However, Ebitda margin expanded ~140bp y-o-y to 24.1% on lower other expenses/employee cost (-670bp/-120bp y-o-y as % of sales). Ebitda improved by ~16% y-o-y to Rs10.5 bn. Adj. PAT grew at a higher rate of 21% y-o-y to Rs 5.8 bn on a lower tax rate.

Highlights from commentary: Cipla expects Rs 4-5 bn savings in opex on an annual basis in FY21, led by lower travel/conference expenses due to COVID-19. Cipla now has 65% of Proventil’s market share. It has 6%/8% market share of Albuterol/Albuterol Generics + AG weekly Rx. There are opportunities to take market share in the generic Albuterol market. Pricing has reduced by 25–30% from Jan’20 levels.

Valuation and view

We expect a 29% earnings CAGR, led by niche launches in US Generics, coupled with a ramp-up in Albuterol Sulfate and improved growth through renewed strategy in Domestic Formulations (DF). We value Cipla at 22x 12M forward earnings to arrive at TP of Rs 790. Maintain Neutral rating.