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Major launches H2FY23E

Cipla reported better than expected earnings for Q2FY22. Revenue grew 10% YoY (flat QoQ), with EBITDA margin at 22.2%. Q2 performance was led by weak base in branded markets of India, Brazil, and EM. US market revenue was USD142mn, flat YoY and QoQ. The management expects to comfortably sustain 22%+ annual EBITDA margin, going ahead. US revenue growth has been stable in H1, with major improvement in quarterly trajectory expected beyond H2FY23E.

We see stable market share for gAlbuterol at 15%, and gRevlimed, gAdvair and gAbraxane launches would keep the US traction healthy beyond H2FY23E. The management has responded to gAdvair CRL, and is awaiting response from the USFDA. We believe the inhaler story continues, while the pandemic is ebbing. We maintain our BUY rating with a TP of Rs1,120 (26x average FY23-24E EPS).

India segment declined 11% QoQ, in line with expectations

India business grew 16% YoY but declined 11% QoQ to Rs24.1bn (44% of sales). Contribution of the Covid-drugs basket declined 60% QoQ amid lower Covid cases during the quarter. Excluding the Covid-drugs basket, growth was 10% YoY. Management highlighted that the Covid-19 basket contributes nearly 5% of total sales and has lower gross margins. Consumer health business and trade generics segment are doing well.

US business outlook remains strong beyond H2FY23

US generics business revenue grew 2% YoY and 5% QoQ to USD142mn (19% of sales). The management highlighted that it had seen its highest volume growth, which was dampened by pricing pressure. Market share stood at 15% for Albuterol and 24% for Arformoterol. The management expects better quarterly revenue trajectory, with higher niche launches from H2FY23E – aRevlimid, gAbraxane and gAdvair. The company is actively exploring partnerships for the other CNS asset. gAdvair approval is likely in H2FY23E (two years) and CRL has been responded to; the company is now awaiting the agency’s response.

EBITDA margin expected to improve and sustain ahead of 22%

EBITDA margin contracted 114bp YoY and 224bp QoQ to 22.2%, better than our expectation, driven by better gross margin and higher operating leverage, given higher support from export sales (EMs). EBITDA contraction had 80-100bp impact from inventory write-offs and cost pressures. EBITDA margin should benefit from cost efficiencies despite expected R&D spend to increase to 6% of sales. EBITDA base expected to move higher for H2FY23 given the high value launch in US

Valuation and view

India business could post market-beating growth in FY22 while US business is expected to post faster ramp-up starting 2HFY23, with new launches like aAbraxane, gAdvair and gRevlimed. Considering lower R&D spend, given that major trials have been completed, along with consistent cost optimization, we expect better earnings trajectory.

We look forward to (1) opportunities from inhaler – gAdvair filed in May 2020; (2) biosimilar product filings; (3) China market entry, focused on respiratory segment – more of H2FY22 opportunity. We maintain our multiple at 26x average of FY23E & FY24E EPS, marginally changed our FY22/FY23E earnings, and introduced FY24E. BUY with a TP of Rs1,120. At CMP of Rs917, the stock trades at 22.8x FY23E EPS of Rs40.1 and 19.4x FY24E EPS of Rs47.2.

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