Cipla's Q3FY20 results (Outperformer) - EBITDA miss; Sharpens profitability focus

Q3FY20 result highlights

• Revs for the quarter stood at Rs43.7bn vs est of Rs43.5bn; US revs stood at $133m in line – Mgt indicated that gSensipar sales have largely normalized during the qtr in value terms
• India business grew 12% yoy to Rs17.8bn vs est of Rs16.8bn. Turnaround in trade generics occurred faster than expected (7% yoy); Branded generics segment grew 14% yoy; SAGA sales also beat est with rev of Rs8.3bn vs est of Rs7.9bn; 20% CC growth yoy
• EBITDA was Rs7.6bn (-17% qoq) vs est of Rs8.6bn; EBITDAM (incl. OOI)- 17.3% (20.7% in Q2) vs 19.8% est. Adj for overhead charge on FG inventory movement, EBITDA came at 18.5%. GMs came lower at 61.2% (65.7% in Q2) vs est of 64.5%. Overheads came at Rs20.2bn (7% qoq) vs est of Rs19.5bn. R&D spends were at Rs3.1bn vs Rs2.9bn in Q2. Reported PAT stood higher at Rs3.4bn (-28% qoq) vs est Rs4.4bn.
• Key points: On the domestic side, trade Gx largely normalized and BGx continues to grow steadily. gSensipar has ceased to be meaningful from Q2. Base business stable in $120-130m region though new niche launches (including gAlbuterol) are delayed. gAdvair trials have ended with data read-out expected in March’20. First specialty product IV Tramadol NDA filed this quarter.
• Mgt also articulated a strong focus on profitability enhancement going forward involving rationalization of R&D spends and capping of US speciality investments. Company also outlined plan to further strengthen its strong position in the domestic formulations space.

Impact on financials: We have reduced our FY20/FY21E earnings estimates by 12%/10% to build lower US sales / GMs

Valuations & view

Strong recovery in domestic formulations (branded as well trade) along with stable US sales over the last two quarters mitigates concerns that had cropped up post a lacklustre Q1. However, delay in new niche US launches including gAlbuterol is a disappointment. From a medium term perspective, management focus on enhancing profitability through rationalization of US generic / speciality investment along with marked stepping up of focus on key India and South African markets is fairly positive as it should further improve the cash flow generation / return ratios. Maintain Outperformer with TP of Rs545 (18x FY22E EPS)