Cipla's Q3FY19 results (Outperformer) - EBITDA in-line; US begins to ramp-up
Q3FY19 result highlights
- Revs came lower at Rs40bn vs est Rs40.6bn. Domestic sales came lower at Rs15.9bn (-1% yoy; est Rs17.1bn); adj for de-stocking, yoy growth was 6%. US sales grew strongly to $118mn ($108m in Q2; in-line). SAGA sales came higher at Rs7.8bn (+3% qoq) vs est of Rs7.2bn
- EBITDA came in lower at Rs7bn (flat qoq) vs est of Rs7.1bn; EBITDAM- 17.7% (17.5% in Q2) vs 17.5% est
- GMs came lower at 62.6% (64.2% in Q2) vs est of 64%. Mgt indicated that GMs have been impacted by ~150bps due to liquidation of low margin tender inventory. SG&A cost stood lower at Rs18.3bn (-3% yoy) vs est of Rs19.1bn. R&D spends were lower at Rs2.9bn vs Rs3.2bn in Q2.
- Tax rate stood higher at 28% vs est of 26%. Reported PAT stood lower at Rs3.2bn (-12% qoq) vs est Rs3.6bn.
- Mgt maintained guidance of Q4 US sales of $120-125m; Resolution of manufacturing issues by next quarter.
Key positives: US sales; lower SG&A cost
Key negatives: India sales, lower GMs and higher tax rate
Impact on financials: We have reduced our FY19 EPS estimates by 3% and broadly maintained our FY20/FY21 EPS estimates
Valuations & view
Cipla’s 9mFY19 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. Sharp sequential pick-up in US sales ($118m for Q3FY19 vs $108m in Q2) and guidance for $120-125m Q4 sales mitigates concerns on Cipla’s ability to grow the US business despite a slew of niche approvals. The expected pickup in high margin US sales will help to effectively fund the desired R&D investments and also improve the overall profitability of the business. This will complement the steady profitability growth in Cipla’s sturdy domestic formulations franchise. Likely bottoming of the EM and South African business by H2FY19 will act as further tailwinds to Cipla’s profitability going forward. We expect earnings to grow at 23% CAGR over FY19-21e. Maintain Outperformer with price target of Rs576.
Cipla is a global pharmaceutical company based in India. Co. manufactures over 1,000 pharmaceutical products for therapeutic areas such as cardiovascular, children's health, dermatology and cosmetology, diabetes, human immunodeficiency virus/acquired immuno deficiency syndrome (HIV/AIDS), infectious diseases and others. Co.'s operations are organized along four business units: Active Pharmaceutical Ingredients (API - 200 generic and complex APIs); Respiratory (inhalation therapy); Cipla Global Access (HIV/AIDS, malaria, multi drug-resistant tuberculosis, and reproductive health); and Veterinary. Co.'s products are sold in India, Africa, Middle East, Europe, Americas, Asia and Australia.
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