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Efforts towards building a sustainable growth thrust

* We met the management of CIPLA to understand its outlook on the business.

* CIPLA is expanding its product offerings (own and in-licensing). It is recalibrating the positioning of products into Prescription, Trade Generics, and Consumer Healthcare categories in India.

* Product development and approvals remain on track for differentiated launches in US Generics, which will drive growth till FY25.

* Overall, we expect 18% earning CAGR over FY22-24, led by 5%/22% sales CAGR in the India/US segment and 240bp margin expansion. We value CIPLA at 23x 12-months forward earnings and add INR40 (NPV related to g-Revlimid) to arrive at our TP of INR1,180. We maintain our Neutral stance, given the limited upside from current levels

Multi-prong strategy to drive one-India business

* The focused approach in each category of Prescription (Rx), Trade Generics (Gx), and Consumer Healthcare (CHS) is paving the way for better sales prospects as well as profitability in India (14% sales CAGR over FY18- 22; 15% YoY growth in 2QFY23, excluding sale of COVID-related products).

* In the Rx segment, CIPLA is implementing innovative ways (BreathFree app), particularly in Respiratory therapy, to expand its market share (22% of the covered market). It has seen ~50K downloads till date, making it one of the most popular apps for educating patients on Asthma.

* In newer therapies like Anti-Diabetes, it is building a portfolio via own launches and the partnership route (Humalog/Trulicity/Oboravo/ Tiptengio).

* In addition to gaining traction via the Trade Generic route way in nonmetro cities, the management is contemplating using MRs to generate business through prescriptions. It is also expanding the therapies within the Trade Generics segment. ? The selective transition of products to Consumer Wellness from Rx/Gx, a robust media campaign, and a wide distribution reach (physical/digital) has led to sales of INR5b in FY22. Its focused approach with mothercare, feminine hygiene, and skin care are expected to enhance value in the CHS segment.

Strategy to drive growth beyond FY25 in the US segment a work in progress

* CIPLA is on track to sustain the growth momentum in US sales (13% CAGR in CC terms over FY18-22), led by differentiated launches in Peptide, Injectables, and the Inhalation segment till FY25.

* g-Advair remains the near term opportunity, in addition to market share gains in g-Lanreotide/g-Leuprolide, and business opportunity from settled products (g-Revlimid).

* As the base business expands, CIPLA may need to add new categories of products to offset the price erosion in the base business and still remain on the growth path.

Focus on DTM and newer geographies to drive sales in the international market

* International sales have been stable in FY22/1HFY23 (USD385m/USD189m) in USD terms. Forex volatility and inclination towards local products have affected growth in the international market.

* Increased contribution from direct-to-market (DTM; 41% of FY22 international sales) in select markets of the UK, Sri Lanka, Morocco, and the addition of newer markets like China, Brazil, and Australia are expected to improve growth in international markets going forward.

Valuation and view

* After clocking almost steady earnings (INR15b) over FY18-20 and scaling it up to INR28b (on an adjusted basis) in FY22, we expect CIPLA to deliver 18% earnings CAGR over FY22-24 on the back of niche launches in the US and outperformance in the Branded Generics market.

* The increased contribution to profitability from US Generics is expected to keep the overall valuation multiple under check, given that the Generics business trades at a much lower multiple as compared to Branded Generics.

* The regulatory risk in US Generics remains high at the industry level, demanding a better risk-reward ratio.

* As the valuation provides limited upside from current levels, we maintain our Neutral rating on the stock.

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