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MOSL: CIPLA (Neutral)-COVID / Operational efficiency drives earnings

CIPLA: COVID / Operational efficiency drives earnings

(CIPLA IN, Mkt Cap USD10.3b, CMP INR946, TP INR1000, 6% Upside, Neutral)

 

• CIPLA delivered better-than-expected 1QFY22 earnings, led by a superior product mix, operational cost efficiency, a healthy off-take of COVID-related products, and one-time income from the API segment. Cipla is poised to outperform the Domestic Formulation (DF) market and is progressing well on building a complex product pipeline for North America (NA).
• We raise our EPS estimate by 6%/4% for FY22E/FY23E, factoring in a) strong traction in prescription/trade generics in the DF segment, b) an extended benefit from cost savings, and c) lower R&D spend. We continue to value Cipla at 24x 12M forward earnings to arrive at Target Price of INR1,000. Cipla continues to enhance its niche pipeline for the US market – by building peptide-based products (in addition to respiratory assets) – as well as gain share in the DF market. Nevertheless, we maintain a Neutral rating on a limited upside from current levels.

 

Highest ever revenue run-rate in a quarter

• Cipla’s 1QFY22 adjusted revenues grew 25.5% YoY to INR54.5b (our est.: INR55.3b). It saw one-time profit share income from its commercial partner in the API segment.
• DF sales grew 69% YoY to INR27b (50% of sales). Adj. for one-time profit share, API revenue grew 22% YoY to INR2.2b (4% of sales). SAGA revenue grew 10% YoY to INR8.4b (15% of sales). North America sales grew 2% YoY to INR10.4b (USD141m; up 5% in CC terms; 19% of sales).
• International market sales declined 13% YoY to INR6b (11% of sales).
• The gross margin (GM) contracted ~130bp YoY to 62.1% due to a change in the product mix.
• The EBITDA margin declined at a lower rate of ~40bp YoY to 23.7% due to lower employee expenses (down 150bp YoY).