Add Cipla Ltd for the Target Rs 1,450 by Emkay Global Financial Services Ltd
Cipla’s 1QFY27 EBITDA was ~11%/6% below our/street estimates. The miss in reported EBITDA margin (~120bps vs our estimate) was gross margindriven, with the lower gross margin being attributed to multiple one-offs. Adjusted for the change in accounting treatment of promotional spend, gross margin would have been higher by ~60bps, albeit the magnitude of the EBITDA margin miss would also have been slightly higher (by ~30bps). The management’s FY27 EBITDA margin guidance range (18.5-20%) remains unchanged, though we note that the street is currently at the upper end of that range. The continued delay in approvals for key assets in the US pipeline could lead to more disappointments ahead, on the US front. However, our ADD thesis on Cipla (refer to our rating upgrade note) is largely centered on the premise of limited downside, even in a bear case scenario for the US business. In our view, the stock will not correct as long as the double-digit domestic growth narrative stays intact (which is largely driving the stock’s valuation at this point; the domestic in-licensed portfolio being a key driver of this growth, notwithstanding). The upside in the name will stem from the new product approval momentum in the US setting in. We cut our earnings estimates by ~6% and roll forward to Jun-28E EPS; retain ADD with unchanged TP of Rs1,450.
Domestic performance in line with expectations; US sales marginally below
Domestic sales growth (12% yoy) was in line with expectations, with the muted performance in consumer health being offset by higher branded prescription sales (aided by contribution from Yurpeak, Inzpera, and the Pfizer portfolio). US sales at $162mn were marginally below our estimate. Adj gross margin stood at 63.1% (~100bps below our estimate) and adj EBITDA margin stood at ~16.5% (~150bps below our estimate).
KTAs from the earnings call
1) Expect US sales to witness qoq growth in subsequent quarters in FY27, on the back of new launches; expect to launch 3 respiratory products and one peptide. Of the 3 respiratory products, two have been filed from the US and one from Goa.
2) The company has a domestic field force of ~12,000 and does not plans to add manpower in FY27, with focus instead remaining on improving productivity.
3) Cipla holds the highest market share in the overall US Albuterol market. The company commercialized gVentolin in 1QFY27 and expects volumes to scale up going forward, with the market unlikely to become crowded.
4) Cipla’s partner for Lanreotide, ie Pharmathen, has undertaken remediation at its facility, and Cipla intends to request the FDA for resumption of supplies. Cipla has also initiated tech transfer of the product to a US-based CMO.
5) South Africa sales were impacted by the loss of a tender, the impact of which will also be seen in subsequent quarters.
6) 1Q gross margin was impacted by product mix, war-linked disruptions, inventory-related charges, and phasing of incentives.
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