Cipla's Q1FY19 results (Outperformer) - Other income boosts PAT

Q1FY19 result highlights

• Revs came lower at Rs38.5bn vs est Rs40.8bn. Domestic sales were lower at Rs15.4bn (+22% yoy) vs est of Rs16.5bn. US sales came surprisingly lower at $100mn ($105m in Q4FY18) vs est of $112mn. Mgt attributed it to SKU rationalisation ($5m) and supply disruptions ($5mn); API stood higher at Rs2bn (+48% qoq) vs est of Rs1.4bn.
• EBITDA came in lower at Rs7.3bn vs est of Rs8.4bn driven by revenue miss; 18.4% margins vs 20.6% est. GMs came in at 63% were in-line. SG&A cost were Rs17.8bn (+5% yoy) – showing continuity on cost control front. R&D spends were flat qoq at Rs2.8bn (7.2% of sales)
• Other income stood higher at Rs1.7bn (includes Rs0.8bn from Chase Pharma sale and Rs0.35-0.40bn net forex gains) vs est of Rs0.5bn, while depreciation cost stood lower at Rs2.4bn vs est of Rs2.8bn. Tax rate stood higher at 28% vs est of 22%.
• Reported PAT came inline Rs4.5bn vs est Rs4.4bn.

Key positives: Higher other income; inline SG&A cost

Key negatives: Lower US and India sales

Impact on financials: We have maintained our FY19/20 earnings est

Valuations & view

With flat profits over FY13-17 at ~Rs15bn, Cipla reported “below potential” earnings for a prolonged period as revenue growth failed to match aggressive growth investments. With a change in strategy and management, signs of profitability turnaround have finally been visible from FY18 onwards. Q1FY19 performance, albeit a bit subdued, is broadly in-line with this upward trajectory. Scale-up in US business revenues and profitability through launch of niche ANDAs (reflected in 3 niche approvals in first 5 months of FY19) should significantly add to this momentum. Over the medium term, Cipla’s relatively small US business (~$385m in FY18) should grow briskly as the on-going R&D investments in developing complex drugs including multiple inhalation products begin to yield results. This will complement the steady profitability growth in Cipla’s sturdy domestic formulations franchise. We estimate 20% EPS growth over FY18-20E medium term as Cipla capitalizes on its “underleveraged” R&D capabilities. Maintain Outperformer with price target of Rs665.