MOSL: CIPLA (Neutral)-Miss on revenue-margins sustained-PAT includes one-off

​Cipla: Miss on revenue; margins sustained; PAT includes one-off

(CIPLA IN, Mkt Cap USD6.9b, CMP INR543, TP INR520, 4% Downside, Neutral)

• 1QFY18 revenue declined 3% YoY to INR35.3b (~15% miss). Gross margin came in at 65.7% (+ >400bp YoY; +340bp QoQ). Current quarter gross margin includes ~150bp of one-off benefit, which is not expected to get repeated in the coming quarters. EBITDA came in at INR6.5b, with the margin at 18.3% v/s our estimate of 18%. Despite miss in EBITDA, PAT of INR4b exceeded estimate by ~6% due to higher other income (includes gain of INR1.2b from divestment of animal health business in SA).
• Domestic business hurt by GST; US business to grow on key approvals: Domestic business fell 12% YoY due to destocking ahead of GST rollout (hit of ~INR450m, mainly on revenue). CIPLA expects domestic business to grow at low-to-mid-teens in coming quarters. It expects key approvals in FY18, with at least one limited-competition product per quarter starting 2Q (incl. Sevelamer, Nano-paclitaxel & Albuterol MDI), which should drive US sales.
• Earnings call takeaways: a) R&D as % of sales stood at 6%; expected to remain at 8% in FY18E, and not more than 9% in coming years. b) One differentiated launch in US is expected every quarter starting late 2Q; c) Invagen sales stood at USD54-55m in the quarter. d) 20-25 planned ANDA filings in US in FY18E. e) Gross margin expected to be ~64% at normalized levels. f) Pricing pressure in US stood at high-single-digit to low-double-digit. g) Tender business is ~1/3rd of total in SA. h) EBITDA margin guidance maintained at mid-to-high teens.