4QFY20 results of Cipla Lockdown lowers growth prospects in DF/overall earnings

Cipla: Lockdown lowers growth prospects in DF/overall earnings

CMP: INR570 TP: INR550 (-4%) Neutral

Enhancing Respiratory pipeline for US on track

·         The EBITDA margin trajectory has been on the downtrend for the past four quarters, partly due to increased competition in potential products. The intensity further increased in 4QFY20 due to COVID-19.

·         Cipla’s Respiratory product pipeline for US Generics is shaping up well, providing growth visibility over the next two to three years. Also, efforts to improve synergies across the Prescription, Trade Generics, and Consumer portfolios for the India business have started to yield results.

·         However, we cut our EPS estimates by 7.5%/3% for FY21/FY22 to factor the lockdown-led decline in the Domestic Formulations (DF) business. We maintain our price target at INR550 as we roll out our price target on a 20x 12M forward basis. Maintain Neutral, as the valuation factors a potential upside in earnings over the medium term

COVID-19-led lower-than-estimated performance

·         4QFY20 revenues were flat YoY at INR43.7b (our est.: INR43.1b) as 12% YoY growth in India (40% of sales) was offset by decline in US sales (down 27% YoY; 20% of sales at USD118m) and EU sales (down 1% YoY; 5% of sales), and muted growth in the SAGA business (19% of sales). Within SAGA, the South Africa Private Market business grew 10% YoY in the local currency rate.

·         The gross margin (GM) contracted ~180bp YoY (-100bp QoQ) to 61.4% due to a change in the product mix. The EBITDA margin contracted further by ~740bp YoY to 14.4% due to lower operating leverage (employee/other expenses (+130bp/120bp YoY as a percentage of sales). EBITDA declined ~34% YoY to INR6.3b (v/s est. of INR7.7b).

·         Adj. PAT declined at a higher rate of ~46% YoY to INR2.7b (v/s our est. of INR3.6b), weighed by a higher tax rate.

·         For FY20, sales/EBITDA/PAT grew 5%/4%/5% to INR171b/INR32b/INR15.7b, led by moderate performances in key geographies: India/U

Highlights from management commentary

·         Lockdown impacted sales of INR2b for 4QFY20. The decreased share of highmargin businesses, coupled with cost related to remediation toward the Goa facility, dragged down the EBITDA margin by 200bp for the quarter.

·         Cipla has guided for moderation in R&D spend for FY21. n Albuterol is a 60m unit market. The market is interchangeable between gProair and gVentolin. Another player is in queue to acquire approval for Albuterol.

·         Capacity utilization is up by 80–85% against that in the lockdown scenario

Valuation and view

·         We expect 21% earnings CAGR, led by niche launches in US Generics and improved growth through renewed strategy in Domestic Formulations. We continue to value Cipla at 20x 12M forward earnings to arrive at a price target of INR550. Maintain Neutral, as the valuation leaves limited scope for return from current levels.