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All round beat Strengthening complex pipeline to cater to future growth

* CIPLA delivered an operationally in line performance in 3QFY21. Superior execution in Domestic Formulations (DF), EU segment, and reduced opex led almost to the doubling of earnings YoY. The management is seeing good progress in the building of a pipeline in the Complex Inhaler space. It is gaining market share in the commercialized Inhaler (Albuterol Sulfate).

* We have raised our FY21E/FY22E/FY23E EPS estimate by 7%/8%/10% to factor in: a) manufacturing constraints of one of its peers in Albuterol Sulfate, b) superior execution in DF across Prescription, Trade Generics, and consumer Healthcare segments, and c) gradual increase in operational cost in the Branded Generics space. We roll our price target to INR900, based on 22x 12 months forward earnings. We maintain Neutral due to limited upside from current levels.

PAT at record highs

* Revenue increased 18% YoY in 3QFY21 to INR51.6b (v/s our estimate of INR50.8b)

* DF sales rose 22% YoY to INR22b (43% of sales). EM sales grew 51% YoY to INR4.9b (9% of sales) on a low base of last year. US sales grew 10% YoY to INR10.4b (USD141m; up 6% in CC terms; 20% of sales). SAGA sales increased 10% YoY to INR9b (18% of sales). EU sales were up 33% YoY (5% of sales). API sales grew 22% YoY (4% of sales).

* Gross margin fell ~90bp YoY to 61.4% due to changes in the product mix.

* EBITDA margin expanded ~650bp YoY to 23.8% due to lower employee cost/other expenses/R&D/ (down 70bp/390bp/280bp YoY as a percentage of sales).

* EBITDA grew ~62% YoY to INR12.3b (v/s our estimate of INR11.5b).

* Adjusted PAT grew 2.1x YoY to INR7.5b (v/s our estimate of INR6.5b) due to better profitability and lower tax rate YoY.

* In 9MFY21, revenue/EBITDA/adjusted PAT grew 14%/34%/53% YoY to INR145.5b/INR34.6b/INR20b.

Highlights from the management commentary

* Traction in US sales has been lower, despite ramp-up of Albuterol sales, due to a product recall that happened in 3QFY21.

* g-Advair is under active review. While the target action date (TAD) is in 4QFY21/1QFY22, CIPLA expects approval to take time given the complexity associated with the product.

* The US business is close to company-level profitability in 3QFY21.

* CIPLA has a TRx market share of 86% in Proventil at present. It commands 18% TRx share considering all the brands of Albuterol Sulfate.

* An USD137m loan availed by InvaGen Pharmaceuticals (a subsidiary of CIPLA) has been repaid ahead of schedule. An INR3b working capital loan has been repaid during 3QFY21.

Valuation and view

* We have raised our FY21E/FY22E/FY23E EPS estimate by 7%/8%/10% to factor in: a) benefit from cost optimization measures, b) better offtake of niche products/robust ANDA pipeline in US Generics, and c) healthy traction in Trade Generics as well as Prescription Generics in DF.

* We expect 29% earnings CAGR, led by 14%/14%/12% sales CAGR in US Generics/DF/SAGA over FY20-23E.

* With improving profitability, we expect RoE to expand 400bp from 9.9% in FY20 to 13.9% in FY23.

* We continue to value CIPLA at 22x 12 months forward earnings to arrive at our TP of INR900. We maintain Neutral on limited upside from current levels.

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