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Regulatory issues lead to re-strategizing on niche products

Work-in-progress for filing potential products from alternate sites

* Cipla reported lower-than-expected performance in 4QFY23, led by higher operational cost. It achieved the highest ever annual earnings in FY23, driven by strong traction in North America (NA) sales. Cipla grew better-thanindustry in domestic formulation (DF) market by ~500bp YoY in FY23.

* We cut our earnings estimates for FY24/FY25 by 7%/4% factoring in: a) delays in approval for g-Advair/g-Abraxane, b) costs related to additional field force in DF segment, remediation measures and adding alternate sites for critical products in the US generics segment. We value Cipla at 21x 12M forward earnings and add NPV of INR30 related to g-Revlimid to arrive at our TP of INR970.

* We expect 12.3% earnings CAGR over FY23-25, led by 9%/11% sales CAGR in DF/NA segments and marginal improvement in profitability. Considering a delay in potential launches in NA, regulatory risk at Indore and limited upside from current levels, we maintain our Neutral rating on the stock.

Product mix and operating leverage drive YoY margin improvement

* Cipla’s 4QFY23 revenue grew 9% YoY to INR57.4b (our est. INR57.6b). DF sales (39% of sales) rose marginally by 3.5% YoY (16% YoY growth on exCovid basis). NA sales jumped 39% YoY to INR16.8b (USD204m; up 27.5% YoY in CC terms; 29% of sales) due to strong traction in the differentiated portfolio including market share gains from products. EM sales grew 7% YoY to INR7.8b (14% of sales). SAGA sales declined 13% YoY to INR8.6b (15% of sales). API sales too declined 2.2% YoY to INR1.3b during the quarter.

* Gross margin (GM) expanded 180bp YoY to 64% (our est. 66%) led by superior product mix in 4QFY23.

* EBITDA margin improved 240bp YoY to 20.4% (our est. 23%) led by better GMs and lower employee expense/other expense (-20/-80bp YoY as a % of sales). It was partly offset by higher R&D spend (+40bp YoY as a % of sales).

* EBITDA increased 24% YoY to INR12b (our est. INR13b) in 4QFY23.

* Adj. PAT grew at a lower rate of 16% to INR7.1b (our est. INR8.4b) due to higher depreciation and tax rate for the quarter.

* During FY23, Cipla’s sales/EBITDA/PAT grew 5%/9%/7% to INR228b/ INR51b/INR30.5b

Highlights from the management commentary

* Management guided for 22% EBITDA margin in FY24.

* It expects the USFDA inspection classification from mid-May’23 at Indore.

* Additionally, Cipla has started work on de-risking plan for g-Advair by constructing a manufacturing line at an alternate in-house site. This may require inspection at alternate site for ANDA approval from the USFDA.

* Cipla has also de-risked g-Abraxane (Nano-Paclitaxel) to alternate site. Cipla is under process to make exhibit batches at an alternate site. The commercial benefit is expected in FY25.

* The chronic share in DF was 59% for FY23, up 300bp YoY as a % of DF sales.

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