MOSL: CIPLA (Neutral)-Operationally in line; one-offs in other income boost profitability

Cipla: Operationally in line; one-offs in other income boost profitability

(CIPLA IN, Mkt Cap USD7.4b, CMP INR633, TP INR620, 2% Downside, Neutral)

• CIPLA's 1QFY19 revenue increased ~12% YoY to INR39.4b (est. of INR40.4b), led by growth of 22% YoY in India sales and 48% YoY in API sales. Gross margin shrank 270bp YoY (+100bp QoQ) to 63% due to higher RM cost on the back of supply disruption of key starting material from China, higher crude oil prices, and inventory write-off. EBITDA margin was flat YoY (+340bp QoQ) at 18.4%, as gross margin contraction was offset by lower other operating expenses. EBITDA increased ~12% YoY to INR7.3b (est. of INR7.5b). Other income of INR1.7b included INR340-400m of forex gain and INR800m related to income from divestment of CIPLA's stake in Chase Pharma. Adjusting for the same, PAT was down ~18% YoY to INR3.4b (est. of INR3.9b), as against reported PAT of INR4.5b.
• Outlook positive for US and India businesses: US business grew marginally by ~4% YoY (-1% QoQ) in 1QFY19, led by new launches and also ramp-up in recent launches. US sales were impacted by supply constraints at Invagen site (~USD5m) and product rationalization (~USD5m). CIPLA expects an impact of ~USD5m every quarter in FY19 due to product rationalization. However, it will be offset by new product launches (at least one niche product launch per quarter). In the domestic business, CIPLA expects 12-14% growth in FY19, but guided for subdued growth in 2Q due to a poor anti-infective season and a high base of last year (GST impact).