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MOSL: CIPLA (Neutral)-DF growth betters; product mix change leads muted earnings

Cipla: DF growth betters; product mix change leads muted earnings

(CIPLA IN, Mkt Cap USD5.1b, CMP INR447, TP INR490, 10% Upside, Neutral)

 

New strategy to strengthen synergy in India, more selectivity in R&D for US generics

• India and the US are the key geographies driving earnings growth for Cipla. Particularly in India, Cipla is looking to improve synergies in the areas of distribution, portfolio and customer focus across prescription, trade generics and OTC category. While its ANDA pipeline remains robust, Cipla intends to focus on select value-accretive products with control on R&D spends. However, benefits of these efforts are yet to accrue and better return ratios.
• We cut our EPS estimates by 5%/5%/2% for FY20/FY21/FY22E to factor in the delayed potential ANDA launches in the US generics segment. This adverse impact should be offset to some extent by reduced R&D spends. Maintain Neutral on limited upside from current levels. 

Earnings lower than estimates

• 3QFY20 revenues came in at INR43.7b (in-line), up 9% YoY, led by growth in India/US sales. The US business grew ~11% YoY (USD133m; 22% of sales). Domestic business grew ~13% YoY to INR17.7b (41% of sales). Lower trade generics sales due to change in distributors impacted YoY sales growth in the domestic business.
• EU sales have been flat YoY to INR2b (4% of sales). SAGA business grew 6% YoY to INR8.3b (19% of sales). Within SAGA, South Africa private market business grew 6.5% (20% YoY in local currency) driving growth in SAGA.
• Gross margin (GM) decreased ~110bp YoY (-440bp QoQ) to 62.4% due to change in the product mix. However, EBITDA margin contracted ~40bp YoY to 17.3% due to lower employee expenses (-80bp YoY) as % of sales. EBITDA increased ~7% YoY to INR7.5b (v/s est. INR8.4b).
• PAT increased a marginal ~6% YoY to INR3.5b (v/s est. INR4b) due to the higher tax rate.