Neutral Cipla Ltd for the Target Rs. 1,510 by Motilal Oswal Financial Services Ltd
India, SAGA, and EM drive 4QFY25 performance
Earnings outlook to moderate after a strong show over FY21-25
* Cipla reported lower-than-expected revenue/EBITDA (3%/13% miss) in 4Q. While the segmental mix resulted in better-than-expected gross margin, higher-than-anticipated opex/R&D led to lower-than-expected EBITDA for the quarter. Having said this, the earnings were in line due to higher other income (due to receipt of certain settlement income) and a lower tax rate.
* Cipla’s YoY growth in India business (39% of 4Q sales) improved for the second consecutive quarter, led by a steady execution in chronic therapies and a strategic reset in the trade generics segment. The company has sustained an EBITDA margin in the consumer health segment, driving better overall profitability in the India business.
* North America (NA; 29% of sales) reached an all-time high annual revenue of USD934m, with a healthy contribution from differentiated assets such as gRevlimid. We estimate g-Revlimid sales at USD250-USD300m in FY25.
* Cipla outperformed the industry in the SAGA segment (15% of sales) on the back of new launches across multiple therapies.
* We reduce our earnings estimates by 3%/4% for FY26/FY27, factoring in 1) increased competition expected in g-Revlimid, and 2) continued seasonal headwinds in acute therapies in the domestic formulation segment. We value Cipla at 23x 12M forward earnings to arrive at our TP of INR1,510.
* After a strong 26% CAGR in earnings over FY20-25, we expect its earnings to witness a modest 2% CAGR over FY25-27. While Cipla continues to implement strategies to offset the competitive impact of g-Revlimid and to expand its presence in the North American segment, we anticipate a gestation period due to the progress of products in the pipeline. Valuation would be a key monitorable for any inorganic opportunities. Moreover, the current valuation provides limited upside. Reiterate Neutral.
Improved operating leverage drives margins YoY
* Cipla’s 4QFY25 revenue grew 9% YoY to INR67.2b (est. INR69.7b). India sales (39% of sales) rose 8.5% YoY to INR31.5b. EM sales (15% of sales) grew 22% YoY to INR9b. SAGA sales (15% of sales) grew 33.9% YoY to INR10.2b. The US sales (29% of sales) increased 2% YoY to INR19b (USD221m, down 2% in CC terms). However, API sales (2% of sales) declined 3.7% YoY to INR1.8b.
* Gross margin expanded 70bp YoY 67.5% (our est. 66.6%). EBITDA margin expanded 150bp YoY to 22.8% (our est. 25.4%), due to better segmental mix and lower R&D expense (down 90bp YoY as a % of sales).
* EBITDA increased by 17% YoY to INR15.4bn (below our est. INR17.8bn).
* PAT grew at a higher rate of 41% YoY to INR12.2b (in-line), led by revenue growth, improved profitability, higher other income, and a lower tax rate.
* In FY25, revenue/EBITDA/PAT grew 7%/13.3%/20% YoY to INR275b/INR71b/ INR50.5b.
* R&D spending for the quarter stood at INR4.3b (6.3% of sales).
* Net cash at the end of FY25 was INR104b.
Highlights from the management commentary
* Management guided an EBITDA margin of 23.5%-24.5% for FY26.
* Cipla indicated the US sales run rate to be USD220m for 1QFY26.
* Management highlighted three peptide assets to be launched in FY26.
* Cipla has filed six assets to date in the respiratory space and four more to be filed in the next 12-18 months. It has filed nine peptide assets to date and intends to file 10 more in 12-24 months.
* g-Abraxane/g-Nilotinib would be launched soon.
* The Furacort brand in India has surpassed INR9b in annual sales now.
Valuation and view
* We reduce our earnings estimates by 3%/4% for FY26/FY27, factoring in 1) increased competition expected in g-Revlimid, and 2) continued seasonal headwinds in acute therapies in the domestic formulation segment. We value Cipla at 23x 12M forward earnings to arrive at our TP of INR1,510.
* After a strong 26% CAGR in earnings over FY20-25, we expect its earnings to witness a modest 2% CAGR over FY25-27. While Cipla continues to implement strategies to offset the competitive impact of g-Revlimid and to expand its presence in the North American segment, we anticipate a gestation period due to the progress of products in the pipeline. Valuation would be a key monitorable for any inorganic opportunities. Moreover, the current valuation provides limited upside. Reiterate Neutral.
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