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In-line quarter; complex gx to drive growth ahead

Cipla reported Q1FY23 result with overall sales declined 2.3% YoY to Rs 53.7 bn, led by India sales declined 8% YoY on high base (ex-Covid grew 9% YoY). US sales declined 3% QoQ to USD 155 mn (+10% YoY) by traction in gLanreotide and respiratory products (Albuterol, gBrovana and gMigranal). Gross margin was steady YoY at 62% on better sales mix. Muted staff (4% YoY) and other expenses (8% YoY) led to EBITDA of Rs 11.4 bn (-15% YoY on high Covid base), with margin at 21.3% (-318 bps YoY and +322 bps QoQ). PAT for the quarter stood at Rs6.9bn declined by 15% YoY. We see stable market share for gAlbuterol at ~10%, and gRevlimed, gAdvair and gAbraxane launches would keep the US traction healthy beyond H2FY23E. We believe the inhaler story continues, and future peptide launches in US looks interesting. We continue to remain positive on the stock and recommend ADD with a revised TP of Rs1,040 (24x FY24 EPS of Rs43.2).

India segment de-grew 8%YoY on higher base

India business de-grew 8% YoY (ex-covid growth is 9%), led by sustained momentum across therapies in core portfolio driven by pricing and new launches. Management remains optimistic on outperforming the IPM in mid-term. Consumer health business and trade generics segment are doing well.

US business outlook remains strong beyond H2FY23

US generics business revenue grew 10% YoY to USD155mn (21% of sales). The management is optimistic on sustain this run-rate in the coming quarters supported by new product launches in respiratory and peptides. The Market share stood at ~10% for Albuterol and ~30% 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; the company is now awaiting the agency’s response. gAbraxane the company recently provided FDA with more data and remains confident on H2FY23 approval.

Making sustainable business by FY25

The management has set forward targets for FY25.This include 1) expanding the US complex generic basket with scale up of existing drug and launch of new drugs in respiratory and peptides. 2)Maintaining leadership in SA and Indian markets. 3) Expanding share of consumer business to 10% 3) Sustainable growth through organic and inorganic opportunities 4) Sustaining RoIC at 18-20% by reinvesting in business.

Valuation and view

With India business continue to post stable growth ahead, US business is expected to post faster ramp-up starting 2HFY23, with new launches like aAbraxane, gAdvair and gRevlimid. 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 recommend ADD on the stock and value it at 24x FY24E EPS of Rs43.2. At CMP of Rs978, the stock trades at 26.7x FY23E EPS of Rs36s.7 and 22.6x FY24E EPS of Rs43.2

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