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Steady quarter; strong respiratory pipeline Rs908

Cipla’s Q2FY22 result was above our estimates led by strong performance in India. However, we expect India growth to taper down in coming quarters with declining contribution from COVID-19 portfolio and higher base. EBITDA margin declined 120bps YoY to 22.2%, however in line with our estimates. We expect EBITDA margin to stabilize at 22-23% vs earlier levels of 17-19%. Consolidated revenues grew 9.6% to Rs55.2bn and adjusted PAT grew 6.9% to Rs7.1bn. The company has shown strong performance over past 5-6 quarters in India business led by COVID19 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 Rs1,004/share.

* Result review: Domestic revenue grew 15.6% YoY with increasing volumes across portfolio and recovery in acute segment. COVID-19 portfolio revenues have sharply reduced by 60% QoQ. We expect growth to remain above industry in coming quarters on back of strong product portfolio and improved execution with one India strategy. US revenues stood US$142mn, remain flat QoQ. Sales in South Africa (incl. Global Access) business grew 7.6% led by the growth in the private market. Tender business suffered from order delays from client owing to COVID-19. API business declined 9.0% YoY. EBITDA margin declined 120bps YoY due to higher S,G&A cost. We expect EBITDA margin to sustain at 22-23% over FY22E-FY23E with improving revenue mix and cost control initiatives. High value launches in US like generic Advair, Abraxane, Revlimid and strong performance in the respiratory portfolio can provide additional upside.

* Concall Highlights: 1) Company expects strong growth 2HFY23 onwards led by launches of Advair, Abraxane, Revlimid in the US 2) Guided for Rs8-9bn of FY22 capex 3) Advair – working on CRL 4) Abraxane – in discussion with USFDA; Goa inspection required for approval 5) Company announced a JV with Kemwell for biosimilar development.

* Outlook: We expect revenue/EBITDA/Adj. PAT CAGR of 9.2/10.4/14.2% 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 17.6% in FY23E from 9.4% in FY20.

* Valuation and risks: We marginally tweak our estimates to factor in Q2FY22 results. Maintain ADD on the stock with revised target price of Rs1,004/share (earlier Rs1,000/share) based on 25xFY23E earnings and Rs32/share for Revlimid. Key downside risks: Regulatory hurdles, forex fluctuations and lower growth in India market.

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