India growth, steady margins are key to near-term upsides for Cipla

Over the medium term, success of the new launches in the US would drive gains

Cipla outperformed street expectations in June (Q1FY22) quarter posting its highest ever quarterly revenues. Its operating performance too were better than than street expectations aided by Covid portfolio and one off gains in the active pharmaceutical ingredient business.

The Cipla management believes that the sales momentum will continue in the current financial year with the overall domestic pharma market (excluding Covid sales) expected to grow at 10-12 per cent. The company aims to outperform its domestic peers in FY22.

Despite a strong operating performance and outlook, the stock has shed 3.7 per cent on Friday. While most brokerages have raised their earnings estimates, the street will keep an eye on growth trajectory and margin performance given that the quarter saw some one time gains. Say Anmol Ganjoo and Shashank Krishnakumar of JM Financial, “Normalized growth in the core domestic business and the sustainability of the elevated margin levels (22-23 per cent in FY22 basis management guidance) will remain key near-term monitorables.”

The sales trend in the India market, which accounts for just under half of revenues, will be a key trigger for the stock. The India business segment registered a growth of 69 per cent YoY (50 per cent QoQ) on the back of lower base and contribution from the Covid portfolio. Adjusted for Covid contribution, sales growth came in at 47 per cent.

The company highlighted that the outperformance vis-a-vis peers is on the back of strong volume growth in core therapies as well as traction from new product launches. While the contribution of Covid-19 portfolio to overall sales stood at high single digits, the street will await the impact once the Covid-19 related sales wear off as was the case in June.

New launches and traction in the base business is expected to drive the US business, which is the second largest geography by sales for the company. The company posted a 2 per cent YoY growth with the performance tad below expectations; its US sales have been steady with sales at $141 million over the last four quarters.

Most analysts expect some traction in the second half of the current year with larger gains coming from FY23. Says Alankar Garude of Macquarie Research, “While Cipla has not disclosed its upcoming complex launches in FY22, we do not anticipate a material improvement in US sales over the next two-three quarters, barring continued benefit from scale-up of inhalers Albuterol and Brovana. The company continues to highlight FY23 as a key year for US launches with generic versions of inhalers Advair, Abraxane and one peptide launch, which could drive material shift in US sales trajectory in FY23.”

Margin trajectory is another key factor for the stock. Aided by strong gross margins and cost control measures the company expanded its margins by over 30 basis points y-o-y to 24.5 per cent. The company indicated that margins adjusted for the Covid portfolio is expected to be in the 22-23 per cent range or broadly in line with FY21 levels.

The stock has underperformed the BSE Healthcare over the last six months as well as one year with returns of 7.5 per cent 24.5 per cent. While valuations at 24 times one year forward earnings estimates are lower than historical averages, for the rerating to continue, Cipla has to successfully execute its growth strategies in the US, where it has a robust generics pipeline, as well as the branded businesses in India and South Africa, say analysts at Emkay Research.