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Efforts on track for big launches in US Generics in FY23

Price erosion offsets market share gains in niche products in the US in 2QFY22

* CIPLA delivered an in line result in 2QFY22, led by strong YoY growth in Domestic Formulations (DF) and South Africa. The overall performance was offset by muted showing in the US and API segment.

* We maintain our FY22E/FY23E EPS estimate. We value CIPLA at 24x 12- month forward earnings and add INR40/share of g-Revlimid NPV to arrive at our TP of INR980.

* CIPLA is progressing well with the niche products in the US Generics segment for FY23 as well as building a robust Respiratory pipeline. gAdvair/g-Abraxane/g-Revlimid are leading products that are expected to drive meaningful US sales growth over the next 18-24 months. The India Consumer Health business remains on a strong growth path. With a favorable demand scenario, we expect a gradual recovery in DF, excluding the COVID-related portfolio. We believe current valuations adequately factors in the upside in earnings and hence maintain our Neutral rating.

Operationally in line; lower operating leverage impacts profitability

* Revenue grew by 10% YoY to INR55.2b (est. INR52.5b) in 2QFY22.

* DF sales grew 16% YoY to INR24b (44% of sales). The international markets business (Europe + emerging markets) grew 14% YoY to INR8.2b (15% of sales). SAGA revenue grew 8% YoY to INR10b (18% of sales).

* North America sales grew modestly at 2% YoY to INR10.6b (USD142m; up 2% in CC terms; 19% of sales). API sales declined by 9% YoY (3% of sales).

* Gross margin remained almost flat YoY at 61.3%.

* EBITDA margin contracted at a higher rate of ~120bp YoY to 22.2% due to higher other (+100bp YoY) and R&D expenses, but was partially offset by lower staff cost (-40bp as a percentage of sales).

* EBITDA grew 4% YoY to INR12.3b (est. INR11.7b).

* PAT grew 7% YoY to INR7.1b (est. INR7b) aided by higher other income.

* Sales/EBITDA/PAT grew 17%/13%/21% YoY to INR110b/INR25b/INR15b in 1HFY21.

Highlights from the management commentary

* While healthy launches are expected for the US market over the next 2-3 quarters, the bulk of the meaningful launches (g-Advair, g-Abraxane, and gRevlimid) are expected to happen in 2HFY23.

* The ANDA review of g-Abraxane is on track with the USFDA. It is progressing well on its Respiratory pipeline and plans to begin trials on additional products.

* CIPLA has one partnered Respiratory product under regulatory review, one another Respiratory product is expected to be filed in FY23, and plans to introduce one product into clinical trials shortly.

* On a monthly basis, the COVID-related revenue in DF is down ~60% from its peak.

* Price erosion at the overall US portfolio level is in mid-to-high single digits.

Valuation and view

* We maintain our FY22E/FY23E EPS estimate. We expect 14% earnings CAGR, led by a 16%/9%/10% sales CAGR in US Generics/DF/SAGA over FY21-23E.

* We value CIPLA at 24x 12-months forward earnings and add INR40 per share of g-Revlimid NPV to arrive at our TP of INR980.

* We remain enthused by: a) complex product launches in the US in the 2HFY23, b) strong performance of the India Consumer Health business/Trade Generics/South African private market, and c) gradual recovery in DF, excluding the COVID-related portfolio.

* We maintain our Neutral rating on limited upside from current levels

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