By HSBC Global Research
Covid-19 disruptions impacted Cipla’s Q4FY20 performance; it is seeing a gradual return to operational normalcy. Outlook remains stable for the India business; a scale-up of gProventil is critical to improve US base sales trends. We look for improved execution of US growth drivers. Retain ‘hold’ with higher target price (TP) of Rs 575 (from Rs 560).
Cipla saw a sales impact of Rs 200 crore in Q4FY20 (~5% of total sales) due to challenges in the movement of logistics mainly for its India formulations business and exports to emerging markets in the initial lockdown phase. This shaved off ~200bps from Ebitda margins as supplies were for high-margin sales. Cipla is seeing a gradual return to operational normalcy with manufacturing currently back to 80-85% of pre-Covid levels.
The firm maintained its India sales growth momentum for the third consecutive quarter, reporting Q4 growth of 12% y-o-y. As per Cipla, the demand scenario remains dynamic as business activity varies across differently classified zones amid the lockdown and it watches closely to gauge India’s market growth evolution. It continues to push its ‘One India’ strategy (which integrates prescription, trade generics and consumer health segments).
Cipla’s US inhaler portfolio recently saw a big boost due to successful completion of Phase 3 studies for generic Advair Diskus, and expedited FDA approval for gProventil (albuterol sulfate). It also filed another undisclosed complex inhaler with the FDA. Meanwhile, the scale-up of gProventil will be critical to improve its base US sales.
We like Cipla for its stable outlook for key markets like India and South Africa and calibrated approach to capital allocation. After reaping low-hanging fruit for cost controls, a further improvement in operating margins and RoIC depends on significant scale-up of US sales where we have limited visibility beyond gProventil in the near to medium term.
Front-end investment in the US specialty business could also cap margins/RoIC. After Q4FY20, we adjust our estimates for FY21-22e as per the current business outlook, leading to 4.6%/1.9% cuts in our EPS estimates, respectively. We introduce our FY23 estimates in this note. We increase our target valuation multiple to 21x (earlier 20x) as we roll forward RoE input in Gordon growth model to FY21-23e (earlier FY20-22e). As a result, our fair value target price increases to Rs 575 (Rs 560).
