Cipla's Q4FY18 results (Outperformer) - Below estimates

Q4FY18 result highlights

• Revs came lower at Rs36.9bn vs est Rs38.8bn. Domestic sales grew +13% yoy vs est +12%. On a like to like basis India grew +21%. US sales were Rs6.7bn (4% qoq) vs est of Rs7.1bn with US revs of $105mn vs est of $110mn; API stood lower at Rs1.3bn (-9% qoq).
• EBITDA came in lower at Rs5.6bn vs est of Rs8.2bn; 15.1% margins vs 19.1% est. Other op income came higher at Rs2bn as it included $11mn on account of patents etc which aided EBITDA. Ex OOI, core margins are much lower at ~13.4% impacted by sharply lower GMs.
• GMs came at 61.9% vs est 64.9% - mgt attributed it to adverse product mix arising from seasonally lower proportion of domestic sales; limited contribution from high margin niche US sales wasn’t able to compensate for the same. EBITDA was also impacted by higher SG&A at Rs18.1bn (+3% yoy) as it included Rs450-500mn sales and distribution cost. R&D spends stood lower at Rs2.7bn (7.6% of sales).
• There was a one-off impact of NPPA provision of Rs0.78bn in Q4FY18. Consequently reported PAT came in Rs1.8bn vs est Rs4bn.

Key positives: Higher other operating income

Key negatives: Lower exports sales; lower GMs, higher SGA costs

Impact on financials: We have reduced our FY19/20 earnings by 18%/15%

Valuations & view

Post strong growth over 9mFY18, Cipla’s Q4FY18 performance has been a disappointment. Despite this miss, we believe that the core investment arguments are intact. 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 were visible in FY18. Scale-up in US business through launch of niche ANDAs onwards should 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 Rs595.