MOSL: CIPLA (Neutral)-Weak tender business impacts earnings-US generics – a key monitorable
CIPLA: Weak tender business impacts earnings; US generics – a key monitorable
(CIPLA IN, Mkt Cap USD5.9b, CMP INR528, TP INR520, 2% Downside, Neutral)
- Strong US sales growth offset by weak SAGA business: Revenue grew at a muted ~2% YoY to INR40.1b (our estimate: INR42.5b) in 3QFY19 due to the high base in the domestic formulation (DF) business (40% of sales; -1% YoY) and the weak South Africa Global Access (SAGA) business (19% of sales; -11% YoY). Emerging business (17% of sales; -18% YoY to INR6.8b) too suffered due to geopolitical issues in the Middle East. US business (21% of sales), however, impressed with 11% YoY sales growth.
- Inventory liquidation/higher other operating cost impact profitability: Gross margin (GM) shrank ~150bp YoY (-170bp QoQ) to 62.6%, led by the liquidation of inventory at lower prices and the change in the product mix. EBITDA margin shrank ~330bp YoY to 17.7% due to the contraction in GM and increased operational overheads. Employee expense and other expense increased by ~120bp and ~100bp YoY (as % of sales), respectively. Accordingly, absolute EBITDA declined ~14% YoY to INR7.1b (our estimate: INR7.9b). PAT declined at a much higher rate of ~29% YoY due to tax write-back in 3QFY18. PAT came in at INR3.3b (our estimate: INR4b). For 9MFY19, sales/EBITDA/PAT stood at INR119.6b (+4% YoY)/INR21.4b (-6% YoY)/INR11.6b (-11% YoY).
- Earnings call takeaways: (a) B2B sales in the US generics segment now form ~10% of sales, down from ~30% in 3QFY18. (b) US business is now at EBITDA breakeven. Cipla has guided for 20 launches in the US in FY20. (c) It expects to file 2 ANDAs (including g-Advair) in FY20 in the respiratory segment and one launch every year (starting from FY20). (d) Cipla maintained guidance of INR63-64b revenue in DF for FY19. (e) Despite working on complex products, R&D spend is guided to remain under check over next 12-15 months.
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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