Cipla | Q2FY20 Result Update

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Revival in India business leads to a beat in Q2 

Rating: ACCUMULATE | CMP: Rs 481 | Target Price: Rs 540 | Upside: 13%

Cipla’s Q2FY20 numbers beat all estimates owing to sooner than expected revival in the India business (up 6% YoY, 29% QoQ) following the restructuring of the trade generics segment. Sales grew 8% YoY (we saw flattish growth), and EBITDA margins at 20.7% was higher by 100bps than our estimates. The US reported sales of US$135mn, which includes gSensipar (accounting for ~US$15mn as per our estimate) and strong traction in the recently launched gPregabalin. The company guided that the launch of Albuterol is likely to be delayed by a quarter owing to the inclusion of a dose counter in the device by the innovator. The Phase III trial readout and the subsequent filing for IV Tramadol, the approval for gProventil, and a filing for gAdvair are expected to be the key catalysts in FY21E. The management guided for a 200bps improvement in the tax rate in FY21E as it opts for the new tax rates from FY21E. Building this in our numbers, we increase our FY21E EPS by 5%. At CMP, the stock trades at 21x/18x our FY20/21 EPS of Rs21.8 and Rs27 respectively. We maintain our ACCUMULATE.

Assumptions

In our view, the company will see a strong H2 owing to the base US business generating US$120mn on a quarterly run-rate coupled with one limited-competition launch from Q4 onwards in addition to the resumption of normalcy in the India sales. Higher contribution from India, traction in the private market of South Africa, and cost optimization is expected to aid EBITDA margin expansion.

Estimates shows that Cipla will record 65% gross margin in FY20E, and when adjusted for the one-off gSensipar contribution, this figure will be 63­–64%. While the company has been able to control its employee costs over FY16–19, we still estimate 10% cost CAGR over the next 2 years. This factor in the potential sales force build-up for Cipla’s specialty business towards the end of FY21.

The inhalation pipeline entailing Albuterol is expected to be a catalyst in H2FY21E, which would push sales up to US$630mn in FY22E.

Meanwhile, sales force build-up for commercializing such products from the end of FY21E could jeopardize EBITDA margin accretion at least in the succeeding 2 years.

Cipla’s Goa plant received 12 observations from the USFDA in the end of Sep’19. We estimate that 20–25% of US sales are generated from this plant, and its percentage contribution in 65 ANDAs pending approval would also be on similar lines. While the USFDA has not cited any data integrity issues, we see observations with regards to hygiene and equipment maintenance as critical from the standpoint of injectable launches. Thus, it could take the company up to 12 months to resolve these issues.

2QFY20 Result Snapshot: Sales grew 8% YoY (we saw flattish growth), and EBITDA margin at 20.7% was higher by 100bps than our estimates. The US reported sales of US$135mn, which includes gSensipar (accounting for ~US$15mn as per our estimate) and strong traction in the recently launched gPregabalin. The company’s earnings beat our estimates due to the sooner than expected revival in the India business (up 6% YoY, 29% QoQ) following the restructuring of trade generics segment. While the contribution of gSensipar has tapered, it is still among the top-3 products in the US, leading to gross margin at 65.7% and EBITDA margin at 20.7%. Higher other income boosted PAT at Rs4.7bn (vs our estimate of Rs4bn).

(Result update by Sapna Jhawar from IndiaNivesh Securities Ltd)