Cipla's Q2FY19 results (Outperformer) - Below est by softness in tender biz; muted H2 ahead

Q2FY19 result highlights

• Revs came lower at Rs40.1bn vs est Rs41.5bn. Domestic sales came lower at Rs15.4bn (flat yoy; est Rs16.7bn). Sales were impacted by 0.6-0.7bn due to delayed onset of infective season. US sales came at $108mn ($100m in Q1; est of $110m). SAGA sales came lower at Rs7.5bn (-9% qoq) vs est of Rs8.5bn led by lower tender awards
• Mgt indicated that weakness in global tender sales has been a key driver for soft revenue growth in Q2FY19/H1FY19. Further, mgt indicated that there was sales (high margin revenues) loss of ~Rs1bn / quarter due to supply issues which may continue for some more time
• EBITDA came in lower at Rs7bn (Rs7.3bn in Q1) vs est of Rs8.4bn; Margins - 17.5% vs 20.2% est despite higher GMs came at 64.2% (63% in Q1) vs est of 63%. SG&A cost were higher at Rs19bn (+10% yoy) vs est of Rs18.1bn. R&D spends were higher at Rs3.2bn (8% of sales).
• Mgt indicated that adj EBITDA margins were Rs7.5bn (18.8% margins) as certain R&D related cost offsets were captured in other income.
• Other income came higher at Rs1.3bn vs est of Rs0.8bn, while depreciation cost stood higher at Rs2.8bn vs est of Rs2.5bn. Reported PAT stood lower at Rs3.6bn (-18% qoq) vs est Rs4.6bn.
• H2FY19 guidance: Will be impacted by sanctions in certain parts of business, capacity rebalancing, pressure in tender business and API cost issues; H2FY19 profitability to be at Q2FY19 levels

Key positives: Higher other income; higher GMs

Key negatives: Lower US and India sales; weak outlook for H2FY19

Impact on financials: We have reduced our FY19/FY20 EPS est by 5%/8%

Valuations & view

Cipla’s H1FY19 performance, albeit a bit subdued due to pressure in its global tender business and some supply challenges, builds on the turnaround visible in the business from FY18 onwards. Scale-up in US business revenues and profitability through launch of niche ANDAs (reflected in multiple niche approvals in FY19) should significantly add to this momentum. Over the medium term, Cipla’s relatively small US business 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. Maintain Outperformer with price target of Rs610.