Cipla - Strong all-round performance - ICICI Securities

Cipla reported strong Q1FY21 performance across the parameters with beat of 6.6/60.8/106.4% on revenue/EBITDA/PAT. Further, the growth in most of the markets was above estimate. Consolidated revenues grew 9.0% to Rs43.5bn (I-Sec: Rs40.8bn), EBITDA margin was up 140/760bps to 24.1% and adjusted PAT grew 20.9% to Rs5.8bn (I-Sec: Rs2.8bn). This beat was driven by strong growth in India & US as well as significant operational cost savings. We believe this cost saving is partially sustainable, also articulated by management. We expect EBITDA margin profile to improve to 21-22% from earlier levels of 18-19% with higher than industry growth in India, rationalisation of R&D expenditure with focus on large product opportunities and controlled costs. Focus on India business and improving RoCE remains the highlight. Reiterate ADD.

- Strong growth across geographies: India business grew 15.9% YoY with 46.0% growth in the trade generic sales and 9.0% increase in branded business led by respiratory, cardiovascular and urology. Renewed focus on India with launch of COVID-19 related drugs and in-licensed brands would help in sustaining the strong growth. US revenues stood at US$135mn, up 14.4% QoQ driven by new launches including generic Albuterol. Sales in emerging markets grew 50% in constant currency terms led by strong demand and on a low base. South Africa (incl. Global Access) business remained flat, although it grew 24% in private market in constant currency terms.

- Margins benefited by cost control: EBITDA margin improved 140/760bps YoY/QoQ to 24.1% led by higher revenue and reduction in S,G&A expenses. We believe this margin expansion is partially sustainable, driven by cost control initiatives. We expect EBITDA margin to improve to 21.5% by FY22E with improving revenue mix and cost control with reducing R&D expenditure.

- Outlook: We expect revenue/EBITDA/adj. PAT to CAGR 8.8/15.7/25.2% over FY20-FY22E with EBITDA margin improving 250bps. The company turned net cash in Q1FY21 and FCF generation of ~Rs49bn over the next two years would further strengthen the balance sheet. Management's focus on costs control initiatives, reduced capex requirement and working capital management would aid improvement of the RoCE (Cipla has historically generated relatively lower return ratios). We expect post tax RoIC to improve to 14.0% in FY22E from 9.4% in FY20.

- Valuation and risks: We raise FY21-FY22 earnings estimates by 5-11%, to factor-in the better margin profile (~150bps). We also raise target P/E(x) to 26x from 24x considering increasing proportion of India sales, improving margin profile and strengthening balance sheet. We maintain ADD rating with a revised target price of Rs800/share based on 26xFY22E earnings (earlier: Rs700/share based on 24xFY22E). Key downside risks: Regulatory hurdles, and lower growth in India.

Shares of CIPLA LTD. was last trading in BSE at Rs.778.7 as compared to the previous close of Rs. 795.65. The total number of shares traded during the day was 587770 in over 13029 trades.

The stock hit an intraday high of Rs. 802.6 and intraday low of 768.9. The net turnover during the day was Rs. 459275399.

Source : Equity Bulls

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