Cipla’s 3Q revenues came in at `31 billion (up 12% y-o-y) and were 9% below our estimates primarily due to flat domestic sales, partially offset by strong performance in South Africa and other EMs. EBITDA at Rs 4.5 billion (18% y-o-y decline) was 35% below estimates due to poor business mix, one-offs and high R&D cost. PAT at ` 3.4 billion (5% growth) was below our estimates due to weak sales and margins, partially offset by lower tax rate (3% of PBT).
Domestic formulations sales were flat in 3Q due to change in distribution policy. Excluding impact of distribution policy changes, domestic business grew at 11% y-o-y. Management expects this to normalize in coming quarters.
EBITDA margin at 14.6% (decline of >500bp y-o-y)–significantly below our estimates due to change in business mix, higher distribution cost (250bp) in India, higher R&D cost in 3Q (up 200bp y-o-y) and ZAR depreciation (70bp). Going ahead, margin improvement due to ramp-up of respiratory business and strong US business growth will get partially offset by negative operating leverage in recently opened front-ends.
We maintain Neutral rating on the stock with TP of Rs 600 @ 18x FY18E PER (vs Rs710 @ 20x). We have cut our FY17/ 18E EPS by 3-4% as e build in slower margin improvement.