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Neutral Cipla Ltd For Target Rs.1,000

COVID / Operational efficiency drives earnings

Adding peptide injectables to Respiratory pipeline for US market

* CIPLA delivered better-than-expected 1QFY22 earnings, led by a superior product mix, operational cost efficiency, a healthy off-take of COVID-related products, and one-time income from the API segment. Cipla is poised to outperform the Domestic Formulation (DF) market and is progressing well on building a complex product pipeline for North America (NA).

* We raise our EPS estimate by 6%/4% for FY22E/FY23E, factoring in a) strong traction in prescription/trade generics in the DF segment, b) an extended benefit from cost savings, and c) lower R&D spend. We continue to value Cipla at 24x 12M forward earnings to arrive at Target Price of INR1,000. Cipla continues to enhance its niche pipeline for the US market – by building peptide-based products (in addition to respiratory assets) – as well as gain share in the DF market. Nevertheless, we maintain a Neutral rating on a limited upside from current levels.

Highest ever revenue run-rate in a quarter

* Cipla’s 1QFY22 adjusted revenues grew 25.5% YoY to INR54.5b (our est.: INR55.3b). It saw one-time profit share income from its commercial partner in the API segment.

* DF sales grew 69% YoY to INR27b (50% of sales). Adj. for one-time profit share, API revenue grew 22% YoY to INR2.2b (4% of sales). SAGA revenue grew 10% YoY to INR8.4b (15% of sales). North America sales grew 2% YoY to INR10.4b (USD141m; up 5% in CC terms; 19% of sales).

* International market sales declined 13% YoY to INR6b (11% of sales).

* The gross margin (GM) contracted ~130bp YoY to 62.1% due to a change in the product mix.

* The EBITDA margin declined at a lower rate of ~40bp YoY to 23.7% due to lower employee expenses (down 150bp YoY).

* EBITDA grew ~23% YoY to INR12.9b (our est.: INR10.7b).

* The quarter included a one-time impairment charge of INR1.2b on account of a second Complete Response Letter (CRL) from the USFDA regarding Avenue Therapeutics’ IV Tramadol.

* Adjusted for the same, PAT grew 38% YoY to INR7.9b (our est.: INR6.2b) on account of better profitability, lower depreciation, and lower interest expense.

Highlights from management commentary

* CIPLA guided for EBITDA margins of 22.5–23% for FY22 (adjusted for COVIDrelated benefit).

* It has lined up a few complex products to improve the US sales trajectory. However, meaningful improvement is expected only from FY23.

* It has three peptides in the pipeline. CIPLA has an in-licensing strategy to start building peptide-based products. It has filed an NDA and ANDA for two of the three products to date.

* The India Pharma Market (IPM) is expected to grow 10–12% (ex-COVID impact). CIPLA hopes to outperform IPM.

* The share of COVID products in overall sales was in the high single digits for the quarter.

Valuation and view

* We raise our EPS estimate by 6%/4% for FY22/FY23E, reflecting higher business from COVID products, cost savings, growing market share in g-Albuterol Sulfate, and better growth in the API segment.

* We expect a 15% earnings CAGR, led by an 18%/9%/10% sales CAGR in US Generics / DF / South Africa (SAGA) over FY21–23E.

* We value CIPLA at 24x 12M forward earnings to arrive at TP of INR1,000 on a 12M forward earnings basis. We believe the potential upside in earnings owing to (a) a buildup in the complex portfolio and (b) the outperformance of the DF segment (v/s the industry) is adequately factored in at current valuations and provides a limited upside from current levels. Maintain Neutral.

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