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Weak India performance; cut estimates by 11-12%

Lower operating leverage further affects profitability

* CIPLA delivered a weaker-than-expected performance in 4QFY21, weighed by moderate YoY growth in India Domestic Formulation (DF) / South Africa and YoY decline in API sales for the quarter. CIPLA’s FY22 goals include a) ramping up the COVID portfolio, b) outperforming in the Generics franchise in India / South Africa, c) prioritizing potential Complex Generics launches in the US, d) scaling up the business in Europe / other emerging markets, and e) accelerating digital transformation across markets.

* We cut our EPS estimate by 12%/11% for FY22/FY23E, factoring in a) lower operating leverage, b) increased price erosion in the US base business, and c) inferior execution in the API segment. We value Cipla on 22x 12M forward earnings to arrive at Target Price of INR840. While Cipla is building a complex product portfolio – comprising Respiratory/Injectables and strong traction from COVID drugs – we believe current valuations adequately factor in an upside in earnings. Hence, we maintain Neutral.

Operationally below estimates

* Cipla’s 4QFY21 revenues grew 5% YoY to INR46b (our est. INR52.2b).

* North America sales grew 14% YoY to INR10b (USD138m; up 17% in CC terms; 22% of sales). EU sales grew 14% YoY to INR2.5b (5% of sales). The Emerging Markets business grew 10% YoY to INR4.3b (10% of sales), partly on the low base of last year. DF sales grew 3% YoY to INR18b (40% of sales). SAGA revenue grew 2% YoY to INR8.5b (18% of sales). API sales declined 15% YoY to INR2.2b (5% of sales).

* The gross margin (GM) contracted ~100bp YoY to 60.4% due to a change in the product mix. However, the EBITDA margin expanded ~280bp YoY to 17.3% on lower other expenses / R&D spend (down 290bp/110bpYoY as a percentage of sales).

* EBITDA increased ~26% YoY to INR8b (our est. INR12.5b).

* PAT grew 50% YoY to INR4.1b (our est. INR7.2b) on better profitability, lower depreciation, and interest expense.

* FY21 sales/EBITDA/PAT grew 11.8%/22.2%/52.7% to INR192b/INR43b/INR24b.

Highlights from management commentary

* Cipla indicated products such as Nano-paclitaxel, Lanthanum Carbonate, gAdvair, and other niche products could potentially have a meaningful impact on the overall financial performance of FY23.

* Cipla has 87% g-Proventil market share, ~13.2% Rx share in the overall Albuterol market, and 16.5% Albuterol generic market share. Cipla sees further scope for market expansion.

* The clinical trial for a partnered inhaler asset is complete, with the partner in the process of filing an ANDA. Assuming a 15- to 18-month review cycle, this could prove another interesting launch for FY23.

* US business profitability is now closer to company-level profitability.

* COVID drug sales were ~4% of sales for FY21.

Valuation and view

* We lower our EPS estimate by 12%/11% for FY22/FY23E, factoring in higher price erosion in the US base business and the underperforming API segment.

* We expect an 11% earnings CAGR, led by a 16%/11%/12% sales CAGR in US Generics / DF/ SAGA over FY21–23E.

* We continue to value CIPLA at 22x 12M forward earnings to arrive at TP of INR840 on a 12M forward earnings basis. We maintain Neutral on a limited upside from current levels.

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