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The US/branded generics drive earnings

Work in progress to build complex assets to sustain growth over 3-4 years

* Cipla reported a slight miss on earnings for 4QFY24, largely due to higher opex. It ended FY24 on a strong note with 13%/23%/39% YoY growth in sales/EBITDA/PAT to INR257b/INR63b/INR42b. This was driven by strong traction in the US generics and superior execution in the branded generics segment within domestic formulations (DF) and South Africa.

* We retain our earnings estimates for FY25/FY26. We value Cipla on an SOTP basis (25x 12M forward earnings for base business and NPV of NR30 for gRevlimid) to arrive at our TP of INR1,600.

* While g-Revlimid contributed meaningfully to overall earnings for FY24, we expect a 12% earnings CAGR over FY24-26. This would be largely driven by: commercialization of complex assets in the US and outperformance of chronic therapies in the DF segment, a transformed operating model in trade generics, and sustained growth in the consumer healthcare segment. Accordingly, we reiterate our BUY rating on the stock.

Product mix benefits partly offset by higher opex for the quarter

* Cipla’s 4QFY24 revenue grew 7.4% YoY to INR61.6b (our est. INR61.1b). DF sales (39% of sales) grew 7% YoY to INR24.2b. The US sales (30% of sales) rose 11.8% YoY to INR18.8b (USD226m, up 11% in CC terms). API sales (3% of sales) grew 41% YoY at INR1.9b. The EM sales (13% of sales) rose 5.5% YoY to INR8.3b, while SAGA sales (12% of sales) declined 8.5% YoY to INR7.6b.

* Gross margin expanded 270bp YoY to 66.7% (our est. 64.9%) led by lower raw material costs.

* EBITDA margin expanded 90bp YoY to 21.4% (our est. 23.4%), due to better gross profit offset by operating deleverage. Employee costs/R&D expenses/ Other costs increased 80bp/70bp/30bp YoY as a % of sales.

* EBITDA was up 12.1% YoY to INR13.2b (our est. INR14.3b).

* Adjusting for a one-off gain of INR700m, Adj. PAT grew 22.7% to INR8.7b (our est. INR9.1b) due to higher other income and lower interest costs.

* During FY24, Cipla’s revenue/EBITDA/PAT grew 13%/23%/39% to INR257.7b/INR62.9b/INR42.4b.

Highlights from the management commentary

* Cipla guided 24.5%-25.5% EBITDA margin for FY25. This guidance does not factor in USFDA compliance at the Goa site.

* It has completed remediation measures at its Goa site and awaits the USFDA inspection.

* The company has ~12 assets in peptides/complex generics space to be launched over FY25-27.

* Cipla continues to implement remediation measures at its Indore site.

* It has one biosimilar asset in an early stage of development.

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