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Complex gx to drive future growth

Cipla reported Q3FY23 result in-line with our estimates, with overall sales grew by 6% YoY and flat QoQ to Rs 58bn, mainly driven by highest ever quarterly sales in US to US$195mn up 30% YoY led by flu seasonality benefits and traction in gLanreotide, gArformoterol, stable market share in gAlbuterol, while gRevlimid sales was lower on QoQ. Gross margin came higher at 65% on better sales mix and favorable forex. EBITDA margin came at 24% (up ~180bps YoY). Adj. PAT for the quarter stood at Rs8.8bn excluding the one-time charges for deferred tax reversal. We see stable market share for gAlbuterol and market share gains in gLanreotide/gLeuprolide and gAdvair remains the near term opportunity. Maintain ADD with a revised TP of Rs1,176 (24x average EPS of FY24/25E of Rs49)

India segment stood flat QoQ and grew 2% YoY on higher base

India business grew 2% YoY (ex-covid growth is 11% YoY), 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 reported a highest quarterly revenue, which grew by 30% YoY to US$195mn on flu seasonality benefit. Management indicated that ex.Revlimid sales were higher than Q1FY23. Expect market share gain in gLanreotide and hopeful on approval for gAdvair in H2FY23 as it is working with USFDA to respond to its queries. The Market share stood stable for Albuterol and and Lanreotide. On gAbraxane the company depend on Goa plant clearance.

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 expected to post faster ramp-up with new launches like, gAdvair approval and traction in new niche launches. Considering increased R&D (5.5% to 6% of sales), given key assets in the future pipeline, 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. We maintain ADD on the stock and value it at 24x (average EPS of Rs49 on FY24/25E). At CMP of Rs1,034 the stock trades at 28x FY23E EPS of Rs36.7 and 22x FY24E EPS of Rs47.

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