Cipla reported results in line with expectations. Margins were better than expected led by better mix. Going forward we expect margins to see some pressure led by mix and higher R&D. US revenues were muted despite key launches. It is looking to acquire specialty assets in addition to increased R&D spend on generic. With stock trading at 17.5x FY20e PE, and growth reliant on US, we retain Hold.
Results largely in-line
Cipla reported results in line with expectations. Revenues were 5% below expectation. Gross margins though were 100bps higher and drove 90bps beat on Ebitda margins. Cipla took a Rs 1,737 mn write-off relating to intangibles at Invagen due to adverse competitive and regulatory environment. Lower tax rate led to earnings 8% ahead of expectation.
Strong India, US disappoints
The key disappointment in the quarter was the muted US business. US revenues grew only 4% q-o-q and 2% y-o-y despite new launches. India business growth at 12% was strong. EM markets were also weak and declined 12% y-o-y. Other geographies were largely in line with expectation.
Looking for inorganic specialty targets
Cipla expects spend in R&D to increase going forward. It is looking to use B/S route for its specialty pipeline. It is looking to acquire a couple of PhIII/late PhII assets in the respiratory/neurology space. It is open to PE partner if they acquire a large product. Management indicated that margin will see a drop in Q4 due to mix.
Growth to be steady but valuations limit upside
We expect growth for Cipla to remain strong led by launches in the US market. Pricing challenges, rising cost (led by R&D) though will limit margin improvement. While we expect 21% EPS CAGR over FY17-20, this is dependent on success in the US business, where challenges are rising. Further, the stock trading at 17.5x FY20e PE limits upside.
Valuation/Risks
We adjust our estimates for the quarter. Our FY18-20 EPS falls by 2-3%. While we expect Cipla to report better growth ahead, the risks are high given the execution track-record. With incremental growth driven by US (where visibility is low) and stock trading at 17.5x FY20PE we see little upside. Retain Hold with DCF based PT of `560 implying FY20e PE of 17x. Risks: Delay in key products
in US/UK.
Company description: 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 across the world. It offers prescription drugs for all kinds of ailments—arthritis, cancer, depression—as well as over-the-counter drugs for colds, oral hygiene, and skin care.
