Published on 18/09/2019 9:36:21 AM | Source: Equirus Securities Ltd

Add Cipla Ltd For The Target Rs.553 - Equirus Securities

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Lower tender biz, one-offs dent the quarter ― upgrade to ADD

Cipla’s 1QFY20 was a miss on all counts due to below-expected domestic revenues (realignment of trade generic business, highlighted in 4Q), and lower-than-expected tender revenues (management’s cautious stance in 4Q). Cipla saw record-high gross margins of 70% led by gSensipar (~150bps based on EE) and lower trade generic revenues (~240bps base on EE); margins improved even on adjusting for this, pointing to better base business margins. We pare estimates to factor in lower tender business revenues and a soft domestic business (trade generic business) in 2Q; however, we continue to build in a strong 18% earnings CAGR over FY19-FY21 led by (a) gProventil, launch (b) a niche launch each quarter, and (c) above-market domestic business growth (40% of revenues). Post a 12% correction over last three months, we upgrade to ADD (from REDUCE) with a Dec’20 TP of Rs 553 (Sep’20 TP: Rs 573) at 22x P/E.


Miss led by domestic disruption, one-offs: Revenues at Rs 39.89bn (+1% yoy/- 9% qoq) came in 13% below EE of Rs 45.76bn on (a) a 12% yoy domestic business decline owing to re-alignment of the trade generic business (impacted by Rs 2bn) and deferred supplies of Rs 600mn; (b) lower CGA tender business and Rs 900-1000mn deferred supplies in the EM tender business. Enhanced gross margins (615bps yoy/375bps qoq) were partly offset by lower revenues. Hence, EBITDA at Rs 9.05bn (+25% yoy/-6% qoq) fell 6% short of EE. Better gross margins along with lower opex (led by IND-AS 116 impact of Rs 250mn; 60bps) aided EBITDAM at 22.7% (up 425bps yoy/85bps qoq). PAT at Rs 4.78bn (+7% yoy/30% qoq) came in 7% below EE of Rs 5.13bn.


US biz flat: US revenues at US$ 161 dropped US$ 2mn qoq. Cipla stated that contribution of gSensipar was flat qoq, implying a stable base business qoq. We expect gSensipar (to be fully commoditized from 2Q as expected) to get entirely compensated by (a) launch of gProventil in 2H, and (b) a niche launch every quarter from 3QFY20; we thus continue to build growth in the US market. In 4Q, Cipla stated margins in the US are currently in single digits; we see each new launch to be margin-accretive for Cipla.


Domestic biz disappoints: Domestic sales declined 12% yoy to Rs 13.55bn, down 12% yoy, due to re-alignment of trade generic business (Rs 2bn impact) and deferred supplies of Rs 600mn. Management had highlighted a potential re-alignment of trade generic business in its 4QFY19 earnings call; but the intensity of disruption turned out to be much higher than expected. In secondary sales, it continues to outpace (14%) market growth (12%). Cipla expects branded business to normalize from 2Q and top market growth, and trade generic business to normalize from 3QFY20E with a partial ramp-up in 2Q.


Tender biz tepid: Tender business was hit by re-basing of the global access business (-39% yoy) wherein Cipla calibrated its supplies due to receivable issues. Cipla has a cautious stance for low-margin tenders in global access business with a target to pursue marginaccretive products. For SA tenders, it aims to start supplying for the new 3-year tender for TLE and TLD from 2QFY20 at a similar volume allocation but at lower prices, leading to rebasing. Emerging markets tanked 40% yoy/31% qoq due to deferral of US$ 14.5mn dispatches to 2QFY20, adjusting for which revenues were largely flat sequentially.


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