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2Q in-line; speed breaker ahead for growth in earnings

* Cipla Ltd (CIPLA)’s 2QFY25 operational performance was in line with expectations. This was the fifth consecutive quarter of slowdown in YoY growth in revenue. The superior performance in SAGA/emerging market was offset by reduced YoY growth in domestic formulation (DF)/US.

* We reduce our earnings estimate by 3%/4%/3% for FY25/FY26/FY27 to factor in: a) lower sales of Lanreotide on production modifications; b) unfavorable seasonality in DF; and c) deferral in potential ANDA approvals.

*  North America (NA; 29% of FY24 sales) was one of the key growth drivers in earnings over FY22-24. However, we expect the growth trajectory to moderate for the next 12-15M considering the delay in potential approvals and scope of increased competition in g-Revlimid 4QFY26 onwards. gAbraxane approval is subject to the classification of the recent USFDA inspection at the Goa site. The company may require 9-12M to address the issues highlighted in 483.

*  CIPLA is working on filing g-Advair from its US site. The current product pipeline for FY27 launches has limited visibility to offset the competition’s effect on g-Revlimid (our estimate of FY24 g-Revlimid sales to be USD180m; 20% of NA sales). Accordingly, we also lower PE multiple from 25x to 22x, considering a modest 8% earnings CAGR over FY25-FY27. We arrive at a revised TP of INR1,420.

* Considering the subdued growth prospects/valuation at 24x/22x FY26E/FY27E PE factoring the earnings upside, we downgrade to Neutral.

Segmental mix benefit offset by higher opex on a YoY basis

* CIPLA’s 2QFY25 sales increased 5.6% YoY to INR70.5b (in-line). DF sales (42% of sales) grew 4.7% YoY to INR29.5b. US sales (28% of sales) grew 5.2% YoY to INR19.9b (USD237m, up 3.5% in CC terms). EM/EU sales (11% of sales) grew 9.8% YoY to INR8.1b. SAGA sales grew 7.6% YoY to INR10.7b.

* Gross margin expanded 230bp YoY to 67.6% (our est. 66.9%), led by lower raw material costs. EBITDA margins expanded 80bp YoY to 26.7% (our est 26.4%), as the better gross profit was offset by lower operating leverage. Employee cost/Other cost increase 80bp/90bp YoY as a % of sales.

* EBITDA increased 8.8% YoY to INR18.9bn (in-line).

* PAT grew 10.9% to INR13.0b (our est INR12.3b) due to higher other income and lower interest cost.

* Revenue/EBITDA/PAT grew 5.7%/11.6%/14.3% in 1HFY25. We expect 8.5%/3.5%/2% YoY growth in Sales/EBITDA/PAT for 2HFY25.

Highlights from the management commentary

* CIPLA reiterated EBITDA margin to be in the range of 24.5-25.5% for FY25. It posted an EBITDA margin of 26.2% in 1HFY25.

* CIPLA indicated US quarterly sales to moderate to ~USD220m in 3Q due to production modification at its partner’s site for Lanreotide.

* Price erosion in the US base business stood at ~10% YoY/ low single digit QoQ 2QFY25.

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