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Higher R&D spend curtails margin

Quick Pointers:

* Transition in mgmt. with Achin Gupta to replace Umang Vohra as Global MD & CEO from April 2026

* Revised margin guidance for FY26E downwards to 22.8%-24% vs 23.5-24.5%.

CIPLA’s Q2FY26 EBITDA (Rs 19bn; 25% OPM) was 5% miss to our estimate on account of higher R&D spend (7.1% of sales) and lower GMs. Mgmt has revised its FY26 margin guidance downward owing to elevated R&D spend. Resultant our FY26/27/28E EPS stands cut by 3-6%. The announcement of change in KMP is likely to sentimentally weigh on the stock. We expect Cipla to maintain its existing US sales run-rate however pick up will hinge on timely key respiratory approvals. Cipla’s strong net cash position of +$1.5bn provides flexibility to pursue strategic M&A opportunities. At CMP, stock is trading 24.3x FY27E EPS. Given high FY25 base led by gRevlimid; we see mere 3% EPS CAGR over FY25- 28E. We downgrade stock to ‘Accumulate’ with revised TP of Rs1,675/share (1730 earlier). Timely launch of critical high-value products in the US in H2FY26E/27E will be key

* Strong exports aided revenue growth: CIPLA’s Q2FY26 revenues were up 8% YoY to Rs76bn, in line with our estimates. Domestic formulation reported growth of 7% YoY, we est 8%. Key therapies such as Urology, Cardiac, Anti diabetes and Dermatology outpaced the market. US sales improved to $234mn, up 3% QoQ. The QoQ growth was largely aide d by new launches like gAbraxane negated by price erosion in gRevlimid. One Africa business reported growth at 10% YoY whereas EM + EU markets reported healthy growth of 20% YoY. API segment remained muted, down 8% YoY.

* Higher R&D spend and lower GMs: GMs came in at 66.5%, down 180bps QoQ; led by change in product mix. CIPLA reported EBITDA of Rs19bn; down 2% YoY; missed our estimates. OPM stood at 25%, down 170bps YoY. R&D expenses stood higher at Rs5.4bn, 7.1% of revenue, up 40% YoY. Ex R&D cost other expenses were up 4% YoY. Resultant PAT stood at Rs13.5bn; up 4% YoY.

* Key concall takeaways: Domestic formulation: Growth led by chronic therapies (cardiac +13%, anti-diabetic +10%, urology +7%, dermatology +18%). Chronic mix stood at 61.8%; Cipla aims to outperform IPM growth in coming quarters. Flagship brands like Voltido Trio Ciphaler and Foracort maintained leadership positions. Launched 6 new products in the quarter. Trade generics grew in double digits on a low base, driven by portfolio expansion and improved channel execution. Respiratory business expected to pick up in Q3 (seasonally strong quarter) Management guided for IPM-level growth or higher for H2FY26, supported by new launches and chronic therapy strength.

* Consumer health: Sustained double-digit growth, led by key brands Nicotex, Omnigel, and Cipladine, all retaining category leadership. Expanding distribution reach and investing in media to strengthen brand visibility and scale.

* US business: Albuterol and Lanreotide market share at 22% (IQVIA), maintaining leadership. Lanreotide; further share expansion expected post capacity addition. Filgrastim (biosimilar) launched in Q2 marking Cipla’s first biosimilar entry in the US. gRevlimid sales to further taper off in Q3; base business expected to show sequential growth. Pipeline includes 4 major respiratory launches (incl. gAdvair in Q4FY26) + 3 peptide assets (incl. Liraglutide) by CY26. Management indicated of achieving $1bn annual US revenue run-rate by FY27, subject to timely approvals.

* EMs: Growth led by strong execution in direct-to-market (DTM) model and B2B business. Strategic focus on portfolio expansion and tender participation to drive momentum.

* One Africa: Private market up 5.6% YoY. Growth driven by new launches, tender expansion, and increased demand in key therapy areas.

* GLP-1 portfolio: Eli lilly partnership: Cipla to launch tirzepatide (Mounjaro) under the exclusive brand “YourPeak” in India. Lilly to supply the product; Cipla to promote and distribute nationally. Cipla expects strong demand in Tier-2 and Tier-3 cities with dedicated field force. Hoping to launch Tirzepatide soon. We believe Eli Lilly can onboard more new partners in India. Semaglutide: filing approved but launch deferred beyond Mar–Apr’26 pending regulatory clearance. Cipla to evaluate launch post-approval. Building manufacturing readiness for semaglutide and related peptides.

* Mgmt rejig: Umang Vohra has expressed his intention to not continue as MD & Global CEO post his tenure completion in March 2026. Mr Achin Gupta (erstwhile global COO and CEO of one India business at India) to take over as Global CEO & MD from April 2026; continuity in core strategy with sharper focus on innovation and execution.

* Other highlights: Bommasandra (Bengaluru) facility inspected by USFDA; classified as VAI. Chemwell facility received pre-approval inspection for a fill– finish product. GST transition was resolved during the quarter. R&D guidance increased by 50bps for FY26E. Debt stood at Rs 4.67bn and Net cash balance Rs 99bn in Q2FY26. Margin guidance revised downwards to 22.8-24% vs 23.5- 24.5% earlier in FY26

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