MOSL: CIPLA (Neutral)-Muted quarter led mainly by tender biz-medium-term outlook weak

CIPLA: Muted quarter led mainly by tender biz; medium-term outlook weak

(CIPLA IN, Mkt Cap USD6.2b, CMP INR564, TP INR540, 4% Downside, Neutral)

• A miss on all fronts: CIPLA’s revenue declined ~2% YoY to INR40.1b (our estimate: INR44.7b) in 2QFY19. Tender revenue in South Africa and Global Access/Emerging Market, and non-tender revenue in Europe declined significantly in the quarter. The impact, however, was partially offset by healthy growth in the US and flat growth in domestic formulation (DF) business. Gross margin expanded ~320bp YoY (+130bp QoQ) to 64.2%, led by product mix change. Despite this, EBITDA margin shrank ~220bp YoY to 17.5%, mainly due to higher employee expense (+150bp) and other expense (+330bp). Thus, EBITDA declined by ~13% YoY to INR7b (our estimate: INR8.8b) and PAT by ~11% YoY to INR3.8b (our estimate: INR4.6b). For 1HFY19, sales stood at INR79.5b (+4.5% YoY), EBITDA at INR14.3b (-1.5% YoY) and PAT at INR8.2b (-0.4% YoY).
• Tender business weak; US and India on steady growth path: In 2QFY19, CIPLA’s tender business was impacted across geographies. South Africa and Global Access business (18% of sales) was down 25% YoY to USD108m. Emerging Market (20% of sales) declined by 43% YoY to USD36m, Non-tender Europe (4% of sales) by ~14% YoY to USD20m and API (4% of sales) by 26% YoY to USD24m. The weakness in tender business can be attributed to the sanctions imposed by the US on some countries, which impacted funding, mainly in ARV and anti-malaria. US business (19% of sales) grew by ~23% YoY (+14% QoQ) to USD108m on the back of new launches and ramp-up in recent launches. A high base and a delay in seasonality drove flat sales in DF business (41% of sales).