MOSL: CIPLA (Neutral)-Temporary issues in DF leads earnings miss-Niche opportunity in US drives earnings growth
CIPLA: Temporary issues in DF leads earnings miss; Niche opportunity in US drives earnings growth
(CIPLA IN, Mkt Cap USD5.9b, CMP INR519, TP INR500, 4% Downside, Neutral)
- Decline in DF/SAGA/EM sales counterweigh US sales growth: 1QFY20 sales came in at INR40b, marginally up 1.3% YoY. The US remained the key driver for revenue growth. US sales grew 67% YoY to INR11b (USD162m; 28% of sales), led by ongoing sales from at-risk launch of g-Sensipar. However, this benefit was offset by (a) 12% YoY decline in domestic formulation (DF) sales to INR13.5b (34% of sales), (b) 17% YoY decline in South Africa and Global Access (SAGA) sales to INR7b, and (c) 41% YoY drop in emerging market (EM) sales to INR2.8b.
- Superior product mix drives margins: Gross margin (GM) expanded ~600bp YoY (+480bp QoQ) to 70% due to increased share of niche products in US generics. EBITDA margin expanded at lower rate of 430bp YoY/90 bp QoQ to 22.7% (our est. 22.3%), mainly due to higher other expenses (+90bp YoY as % of sales) and employee cost (+40bp YoY as % of sales). EBITDA at INR9b (est. INR10b) is up ~25% YoY. PAT grew at a higher rate of 31% YoY (due to higher other income and lower tax rate) to INR4.8b (est. INR5.3b).
- Concall highlights: (1) The impact of realignment of distributors in trade generics was ~INR2b. (2) Deferral of sales to July affected prescription business in India by INR700m for the quarter. (3) Deferral of sales in emerging markets was to the tune of USD14m (4) Though R&D cost was 6.5% of sales for 1QFY20, Cipla maintained its guidance of 7-8% of sales for FY20.
- Valuation and view: We lower our EPS estimates by ~5%/7% for FY20/FY21 to factor in the lower trade generics business and ongoing challenges in emerging markets. We roll our target price on 20x (unchanged) 12M forward earnings to INR500 (prior: INR525). Though there are temporary issues affecting growth in domestic formulation and other emerging market business, Cipla remains on track to outperform industry. It also has a healthy ANDA pipeline for the US market. However, we are yet to see meaningful uptick in return ratios. Also, current valuation adequately factors in earnings growth over the next two years. Maintain Neutral.
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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