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US drives beat; upside priced in

Cipla’s Q2FY23 performance was ahead of our estimates on reported front but adjusting for Revlimid sales it was broadly in-line. Revenue grew 5.6% YoY to Rs58.3bn (I-Sec: Rs.55.5bn) driven by strong uptick in US revenue (US$179mn, +15.5% QoQ) which partially benefitted from the launch of Revlimid. Adj. EBITDA margin (ex-covid inventory write-off) expanded 160bps YoY (+260bps QoQ) to 23.8% (I-Sec: 21%). Adjusted PAT was up 17.4% YoY to Rs8.3bn. Company has shown strong performance over the past several quarters in its India business aided by its ‘One India’ strategy which should continue and help sustain the above-industry growth. US business is expected to scale up led by complex launches including Advair and Abraxane. However, we believe the recent run up in the stock price (~20% in 6 months) captures near-term upsides and hence, we downgrade to HOLD with a revised target price of Rs1,091/share.

* Result review: Domestic revenue grew 6.1% YoY, ex-covid growth was ~15% led by growth across core therapies and key brands. Company’s consumer health business also witnessed robust traction across all brands. We expect growth to remain above industry in coming quarters on the back of strong product portfolio, increased focus in chronic therapies and superlative execution with ‘One India’ strategy. US revenue was up 15.5% QoQ to US$179mn, driven by ramp up in Lanroetide and launch of Revlimid in Sep’22. South Africa (including Global Access) declined 12.8% YoY, but grew 10% QoQ with recovery in private market sales. API business fell 11% YoY. Gross margin expanded 310bps YoY led by growth in US which lifted EBITDA margin by 160bps YoY (+260bps QoQ) to 23.8%. Adjusting for Revlimid sales (US$20mn), EBITDA margin was ~22%. We expect R&D costs to increase in near term partially negating the margin benefits accruing from the growth in US and India.

* Concall highlights: 1) US key products: i) Albuterol – MS ~36%, Lanreotide – MS 9.6% (expect 15% by year end). ii) Advair to launch in H2FY23. iii) Abraxane could be delayed by 6 months (earlier guidance was H2FY23). iv) Revlimid – company expects repeatability of sales in coming quarters; 2) covid inventory write-off is complete; 3) reiterated EBITDA margin guidance of ~21-22% for FY23; R&D spend at ~5-6% of sales in near term and ~7% of sales in the long term.

* Outlook: We introduce FY25 estimates and expect revenue/EBITDA/PAT to grow at a CAGR of 5.9/9.2/10.9% over FY22-FY25E, respectively, on a high base. We are positive on the management’s renewed focus on India, prudent capital allocation in developed market and cost-controlling initiatives.

* Valuation and risks: We largely maintain our estimates. Recent run up in the stock price has made valuations fair, hence, we downgrade the stock to HOLD from Add with a revised target price of Rs1,091/share (earlier: Rs1,047/share) based on 25xSep’24E earnings and Rs23/share for Revlimid. Key upside risks: Strong ramp up in Revlimid and potential high-value launches in the US. Key downside risks: Regulatory hurdles and lower growth in Indian market.

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