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Strong performance; margins improves further

Cipla reported strong Q1FY22 performance led by strong India sales and QoQ growth in US. We expect India growth to taper down in coming quarters as covid cases have reduced and base effect kicks in. EBITDA margin improved 40bps on higher base to 24.5% and we expect EBITDA margin to stabilize at 22-23% vs earlier levels of 17-19%. Consolidated revenues grew 26.6% to Rs55bn, EBITDA margin was up 40bps to 24.5% and adjusted PAT grew 39.1% to Rs8bn.

The company has shown strong performance over past 5-6 quarters in India business led by covid portfolio as well as benefits of one India strategy undertaken in FY20 which would help in sustaining above industry growth. US business would gradually scale-up on back of complex launches. Retain ADD with revised target price of Rs1,000/share.

* Strong revenue growth: India business revenue grew 68.5% YoY with 47% growth non-covid portfolio and incremental sales from covid portfolio. We expect growth to remain above industry in coming quarters on back of strong product portfolio and improved execution with one India strategy. COVID-19 related drugs contributed high single digit percentage of total sales in Q1FY22.

US revenues stood US$141mn, up 2.2% QoQ with market share gain in generic Albuterol and Cipla is now among top ten generic companies in US by prescription share. Sales in South Africa (incl. Global Access) business grew 13% in US$ terms and 7% in constant currency terms. API business also grew strong 64.1% led by higher supplies and one-time profit share from partner for commercial supplies of an API.

* Higher revenue and profit share in API drove margin expansion: EBITDA margin improved 40bps YoY on high base on back of strong revenue growth. Gross margin was lower by 100bps due to higher contribution from covid portfolio as well as nonrecurring profit share in API segment. We expect EBITDA margin to drop in coming quarters as revenue level normalizes and to sustain at 22-23% over FY22E-FY23E with improving revenue mix and cost control initiatives. High value launches in US like generic Advair can provide upside.

* Outlook: We expect revenue/EBITDA/Adj. PAT to CAGR at 8.9/10.8/14.2% over FY21-FY23E on high base of FY21 which had ~4% revenue contribution from COVID-19 portfolio and higher cost savings. The company turned net cash in FY21 and FCF generation of >Rs20bn/year over the next two years will further strengthen the balance sheet. We are positive on management’s renewed focus on India business, cost control initiatives and focus on RoCE. We expect RoIC to improve to 17.7% in FY23E from 9.4% in FY20.

* Valuation and risks: We raise earnings estimates by 3-4% to factor in strong Q1FY22 with higher India sales and lower R&D spend. Maintain ADD on the stock with revised target price of Rs1,000/share (earlier Rs966/share) based on 25xFY23E earnings and Rs28/share for Revlimid. Key downside risks: Regulatory hurdles, forex fluctuations and lower growth in India market.

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