MOSL: CIPLA (Neutral)-Domestic business recovers strongly-GM includes one-time cost

​Cipla: Domestic business recovers strongly; GM includes one-time cost

(CIPLA IN, Mkt Cap USD7.5b, CMP INR608, TP INR600, 1% Downside, Neutral)

• 2QFY18 revenue grew 9% YoY to INR40.8b (~5% miss). Gross margin shrunk to 61.1%, from 63.8% in 2QFY17 and 65.7% in 1QFY18. Reclassification of GST and other one-time charges led to a contraction in GM by ~200-250bp. CIPLA estimates GM at ~64% in 2H. EBITDA came in at INR8.04b (4% beat), with the margin at 19.7% (est. of 18%). Depreciation increased significantly to INR3b from INR2.1b in 1QFY18. PAT of INR4.2b was broadly in line.
• Strong recovery in domestic business; key approvals to drive US growth: Domestic business grew 12% YoY (on a like to like basis, GST-adjusted growth was at 19% YoY) and ~30% QoQ due to channel refilling post GST. Channel inventory is still lower by ~10 days v/s GST levels. CIPLA expects to cover 5-6 days in 2H. US sales declined 3% YoY in 2QFY18. We expect US business growth to be driven by ramp-up of Sevelamer (launched recently), and key upcoming approvals such as Nano-paclitaxel and Albuterol MDI.
• Concall takeaways: a) GST implementation impacted top line by ~INR1b. b) Effective tax rate to be ~25% in FY18E. c) FCF post capex was ~INR3.01b in 2Q. d) Net debt/equity stood at 0.18x at end-1HFY18E. e) Filed 5 ANDA in 2Q, of which 2 are limited competition. On track to file 20-25 ANDAs in FY18E. f) Evaluating M&A opportunity in areas such as Neurology. g) US business is at breakeven at EBITDA level. h) Clinical studies for inhalation will start from 2HFY19E; R&D expense in 2H will be ~8% due to this. i) Working capital increase is due to seasonality; it is expected to get normalized by end-FY18. j) Depreciation includes one-time charge of ~USD11m related to impairment of intangibles, which got compensated by higher other income (due to pre-negotiated condition). k) Capex to be ~INR8-8.5b in FY18E.