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Buy Cipla Ltd For Target Rs. 975

Strong growth in India, RoW; better margins…

Q3 revenues grew 18.2% YoY to | 5169 crore led by strong growth in domestic and RoW markets. Domestic sales grew 25.5% YoY to | 2231 crore. RoW markets business grew 47.2% YoY to | 823 whereas South Africa business fell 2.5% YoY to | 579 crore. US grew 9.6% YoY to | 1037 crore. EBITDA margins expanded 647 bps YoY to 23.8% mainly due to significantly lower other expenditure. Hence, EBITDA grew 62.3% YoY to | 1231 crore. PAT more than doubled to | 748 crore vs. | 351 crore in Q3FY20.

Product launches, front-end shift key for formulation exports

Formulation exports comprise ~54% of FY20 revenues. The company is focusing on front-end model, especially for the US, along with a gradual shift from loss making HIV and other tenders to more lucrative respiratory and other opportunities in the US and EU. We expect export formulation sales to grow at 9.8% CAGR to | 12242 crore in FY20-23E. Key drivers will be a launch of inhalers (drug-device) and other products in developed markets

Indian formulations growth backed by new launches

With ~5% market share, Cipla is the third largest player in the domestic formulations market. The acute, chronic and sub-chronic revenues for the company are at 41%, 47% and 13%, respectively. Domestic formulations comprise ~39% of total FY20 revenues. It commands ~21% market share by value in respiratory segment. We expect domestic formulations to grow at 13.3% CAGR in FY20-23E to | 9652 crore driven by improved productivity of the newly inducted field force and product launches besides realignment of the portfolio in sync with its ‘One-India’ portfolio rationalisation exercise

Valuation & Outlook

Q3 revenues were in line with I-direct estimates (albeit skewed). Profitability was better amid lower than expected other expenditure, higher other income and lower depreciation. We continue to focus on the management’s long-drawn strategy of targeting four verticals viz. One-India, South Africa & EMs, US generics & specialty and lung leadership. Recent launch of Albuterol sulphate (Proventil HFA) amid rise in demand for Albuterol products in the ongoing pandemic are vindication of its lung leadership quest. While US focus will be on specialty including hospitals, value accretive generics, India focus will be on branded (Rx), trade generics (TGx). On Africa front, Cipla continues to rebase its business model towards private business in the backdrop of shrinking tender opportunities. Another key aspect to watch would be R&D recalibration. Across the board transformation from tenderised model to private model in exports market, towards rapid consumerisation of important TGx, Rx in India bode well to change the investors’ perspective. We maintain BUY with a target price of | 975 (vs. earlier | 965) including base business value of | 935 (25x FY23E EPS | 37.4 + | 42 NPV for gRevlimid.

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