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Strong quarter, upbeat on outlook

Cipla delivered yet another solid quarter, driven by healthy growth across businesses (India, CGA, Europe, API). EBITDA margin came ahead of expectation at 24% (+647bps YoY, +46bps QoQ), aided by tight control on costs. Cipla is tracking ahead of its initial cost saving guidance of Rs4-5bn for FY21 and expects to retain part of these benefits in the coming quarters. Its US business outlook remains strong as respiratory/ niche filings add longer-term growth visibility. Cipla expects to add USD300-500mn to its US revenue base of USD500mn+ by FY25. In India, while Covid sales contribution is likely to go down materially, recovery in ex-Covid business is expected to drive double-digit growth of ~10% CAGR over the next two years. We expect RoCE to expand by ~550bps over FY20-23e, driven by operating leverage benefits and cost optimisation efforts. Maintain BUY. Our revised TP is Rs 1,020/sh.

* Revenues in line, Margin beat: Revenues at Rs51.7bn were largely in line as strong growth across markets offset muted performance in US (flat QoQ). While gross margins were stable (61.4%, -93bps YoY, flat QoQ), continued savings in staff cost (-72bps YoY, flat QoQ) & other exp (-668bps YoY, -44bps QoQ) improved EBITDA margin to 23.8% (+647bps YoY, +46bps QoQ).

* Strong pipeline drives growth visibility in the US: US revenue remained flat QoQ at USD141mn as market share gains in Albuterol were partly offset by product recall (USD2-3mn impact). Cipla has ~12% market share in Albuterol and ~85% in gProventil category and believes it can gradually ramp up as capacity is not a constraint. US pipeline remains strong with gAdvair, gAbraxane, Albuterol and other respiratory filings driving visibility over the next few years. Its pipeline includes 35 para IV assets with market size of USD42bn. Cipla expects to add USD300-500mn in revenue to its base of USD500mn+ revenue by FY25.

* Key call takeaways: a) US business - margins are at corporate average levels, expect one niche launch per quarter staring from 1QFY22 (USD 15-20mn+); b) gAdvair – TAD is late Q4FY21 or early Q1FY22, R&D spends to remain at 6-7%; c) India – ex-Covid portfolio, growth was at 6-7%, d) US respiratory portfolio – USD100mn+ in 9mFY21; e) Albuterol – Cipla will defend its share as it has a cost edge; f) plans to ramp up consumer business in India and South Africa to 12%+ of sales (vs. 5-7% currently).

* Maintain BUY; risks: We marginally tweak our estimates and revise TP to Rs 1,020, based on 23x FY23e EPS and NPV of Rs30/sh for gAdvair and Rs40/sh for gRevlimid. Risks: lower-than-expected growth in India, slower market share gains in Albuterol, delay in resolution of Goa warning letter, higher price erosion in the US.

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