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Maintain Buy on Cipla - Positive outlook reaffirmed - HDFC Securities

Posted On: 2020-05-18 11:44:51

Mr. Bansi Desai, Institutional Research Analyst, HDFC Securities.

Cipla (Q4FY20): Positive outlook reaffirmed. Maintain Buy
(TP Rs 655, CMP Rs 570, MCap Rs 460bn)

Cipla's Q4 revenues came in line, however, margins missed estimates on account of Covid led disruption and remediation cost for Goa plant. The outlook for key businesses remains strong with US likely to see improved traction on account of ramp up in gProventil and limited competition launches. India growth trajectory has improved (double digit growth in last 3 quarters) and with enhanced focus (implementation of One-India strategy), domestic growth should outperform the market. Cipla's balance sheet further improved with reduction in net debt (Rs8bn) and improvement in working capital days. We believe with healthy earnings growth (~22% CAGR) and core ROCE expansion (~350bps) over FY20-22e, valuations are likely to re rate. We maintain Buy rating and increase our TP to Rs655 based on 22x FY22 EPS.

Inline revenues, margins disappoint: Revenues at Rs43.7bn came in line as strong growth in India (+12% YoY) offset muted performance in US (-25%YoY, -11% QoQ, gSensipar in base), South Africa (+4% YoY, currency impact) and EMs (+2% YoY, logistics impact). EBIDTA margins at 14.5% were impacted due to deferment of sales (Rs 2bn) and remediation cost for Goa. Adjusted for these, margins came at 16.5%, yet lower than our estimates.

India biz to outperform Industry growth: Cipla's One-India strategy to combine its domestic biz verticals - trade generics, prescription biz and consumer health will lead to strong synergies across the portfolio. They have successfully transitioned select brands with high consumerization potential to consumer division from trade generics.

Respiratory franchise boosted by another complex filing: Besides gAdvair (filing imminent), gProventil (launched), partnered product (undergoing phase III trials), Cipla filed for another complex inhaler in the US (IP protected) with launch timelines of 24-30months. This along with limited competition launches and specialty portfolio (IV Tramadol, Zemdri) will drive near to medium term growth in the US.

Key call takeaways: a) Price erosion stabilised, although deflation continues; b) gProventil - has adequate capacity for fair share, pricing remains attractive; c) Other expenses to moderate with lower promotion spend and R&D costs; d) India growth - no panic signal yet, trade has sufficient inventory; e) Guides for further expansion of ROCE over 3-5 years.

Downside risks: Lower-than-expected growth in India, delay in key US approvals, delay in resolution of Goa plant, higher price erosion in the US.

Shares of CIPLA LTD. was last trading in BSE at Rs.570.2 as compared to the previous close of Rs. 569.6. The total number of shares traded during the day was 360013 in over 8314 trades.

The stock hit an intraday high of Rs. 585 and intraday low of 565.9. The net turnover during the day was Rs. 206554749.

Source: Equity Bulls

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