Hold Cipla Ltd For Target Rs. 1,590 By InCred Equities
Tough times ahead
* Cipla’s 2QFY26 results were broadly in line. US biz performance was below estimate, with a QoQ growth of 3%. India biz growth was 6.7% vs. 6% estimate.
* We expect near-term headwinds in the form of delayed launch (gAdvair), margin pressure, and strategic uncertainty. We change our stance to cautious.
* We have cut our FY26F/27F EPS by 4%/6%, respectively. Downgrade our rating on the stock to HOLD (from ADD) with a lower target price of Rs1,590.
Broadly in-line 2Q performance
Cipla’s 2QFY26 growth was above our/Bloomberg consensus estimates by 2%, with margin at 25% being in line with estimates. The US revenue at US$233m (below our estimate of US$235m) grew by 3% QoQ, mainly driven by gAlbuterol and faster uptick in the Lanreotide franchise {505(b)(2) and generic} market share (now at 22%), partially offset by price erosion in gRevlimid. gAlbuterol’s market share has improved QoQ, from 19.5% to 22%. One Africa saw a moderate 5% YoY revenue growth in US dollar terms driven by new launches, tender business and advancement in key therapies. India business grew by 6.7% YoY, above our estimate of 6%. Trade generics and a few therapies (urology, cardiac, anti-diabetes and dermatology) in branded generics recorded strong double-digit growth. The gross margin declined by 170bp/50bp QoQ/YoY while the EBITDA margin declined by 60bp QoQ due to higher R&D expenses. For FY26F, Cipla has revised lower its margin guidance of 23.5-24.5% to 22.75-24% because of higher R&D spending by 50bp (our earlier estimate was in the range of 6-6.5%)
Challenging transition phase
We expect the company’s accelerated R&D investments to compress FY26F margin by ~60bp to 23.5% (vs. 24.1% earlier). Further, the gRevlimid cliff in FY27F is likely to exert additional pressure on both gross and EBITDA margins. The delay in gAdvair launch to 4QFY26F (from early 2HFY26F) and a potential shortfall of ~US$50m in achieving the FY27F US$1bn US revenue target led us to trim FY26F/27F revenue estimates by 2%/3%, implying a growth of 6.2%/7.4%, respectively. Moreover, the ongoing leadership transition introduces an element of strategic uncertainty in the medium term. With execution risks rising and profitability set to moderate, we turn cautious and maintain a ‘wait-and-watch’ stance. We downgrade our rating on Cipla from ADD to HOLD, as nearterm headwinds weigh on our earlier optimism.
Other conference-call highlights
1) Currently, Cipla is the only partner of Eli Lilly for Tirzepatide in India. 2) Tirzepatide will be a material opportunity in Tier-2 and 3 towns. 3) Already recruited and trained the field force for Tirzepatide and it will not be the same for gSemaglutide.
Downgrade to HOLD rating with a lower target price of Rs1,590
Our FY26F/27F EPS stands lowered by 4%/6%, respectively. Downside/upside risks: Delay in the USFDA approval or launch timeline, lower-than-expected margin and viceversa.
Above views are of the author and not of the website kindly read disclaimer
