Cipla's Q3FY18 results (Upgrade to Outperformer) - In line; growth platform in place
Q3FY18 result highlights
- Revs came higher at Rs39.1bn vs est Rs40.3bn. Domestic sales grew +15% yoy vs est +12%. On alike to like basis India grew at +22%. US sales were Rs6.5bn (+5% qoq) vs est of Rs6.8bn; API stood lower at Rs1.5bn (-30% qoq) and SAGA at Rs8.7bn (-6% qoq).
- EBITDA came at Rs8.2bn vs est of Rs8.05bn; 20.9% margins vs 20% est. Other op income came inline at Rs793m. GMs improved to 64% vs est 63%; GMs are up 300bps yoy/80bps qoq. EBITDA was also driven by controlled overheads cost (-1% qoq /+3% yoy) while R&D spends stood higher at Rs3bn (7.6% of sales vs 6% in Q2). Cost control continues to be a key focus.
- Lower other income (Rs0.53bn vs est Rs0.4bn / Rs1.1bn in Q2) and higher depreciation (Rs5.2bn vs est Rs2.2bn) led by Rs1.7bn net one off charge. Additionally there was a one-off tax gain of Rs1.06bn. Reported PAT came in Rs4.03bn vs est Rs4.5bn.
Key positives: Domestic sales; higher GMs, overhead cost control
Key negatives: Lower API and SAGA sales
Impact on financials: We have reduced our FY18 earnings by 3%, increased FY19 by 1% and introduced FY20 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 investments in simultaneously establishing front-end across multiple markets and stepping up R&D investments. With the new management now successfully working on trimming costs and focusing on smaller set of markets, signs of profitability turnaround are visible. Scale-up in US business through launch of niche ANDAs from Q4FY18 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 the domestic formulations franchise. We estimate 36% EPS growth over FY17-20E with potential for faster than industry earnings growth in the medium term as Cipla capitalizes on its “underleveraged” R&D capabilities. Upgrade to Outperformer with price target of Rs660.
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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