Cipla Ltd.|Q2FY15 Result Update | Q2FY15 – weak quarter, an aberration; outlook remains promising :: IndiaNivesh

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Cipla’s financial performance for the quarter was much below estimates, mainly
due to lower exports sales for the quarter. However, lower exports for the quarter
are an aberration and exports sales is expected to be much better in 2HFY15.
Hence we maintain our estimates for FY15/FY16 and maintain our price target to
Rs632, based on 25x FY16 earnings. The outlook remains promising on the back
of transformation which Cipla is undergoing currently and interesting inhaler
opportunity in regulated market. However, the stock has appreciated by 42% in
past three months. Hence we maintain HOLD rating on the stock.
Q2FY15 – weak quarter, an aberration; outlook remains promising
Source: IndiaNivesh Research
Domestic formulation drives sales for the quarter: Sales at Rs26.3bn grew at
subdued rate of 7% y-y for the quarter. Sales growth was mainly led by 20% y-y
growth in domestic formulation (DF) segment. Exports sales declined by 3%y-y due
to very low sales growth in exports formulation and y-y contraction in exports API
sales. Respiratory, Pediatrics, Spectracare and Urology therapies were the key drivers
for better-than-industry growth rate in DF segment. Exports formulation sales
decreased due to less tender business on giving up low margin business, supply
constraints faced during the quarter and product rationalization across the key
markets of Cipla. The higher in-house consumption of API led to sharp y-y decline in
API sales. Despite, 10.6% y-y growth in total sales for 1HFY15, management has
maintained its sales guidance of mid-teens y-y growth for FY15.
Lower exports and higher front end cost suppressed EBITDA margin for the quarter:
Though the gross margin was maintained at 61.4%, EBITDA margin declined sharply
by 490bps y-y to 16%. The superior product mix supported higher gross margin.
The API contribution to total sales also reduced steeply from 8% y-y to 5% for the
quarter due to higher internal consumption supporting increase in gross margin.
The increased employee cost and other expenditure to build front end in regulated
markets continued to put pressure on EBITDA margins of Cipla. This has resulted in
467bps y-y fall in EBITDA margin for 1HFY15 to 16.9%. However, management has
guided for 21.5%-22% EBITDA margin for FY15 on pick-up in exports in 2HFY15 and
sustained momentum in DF segment. R&D spend remained at similar rate of 5% of
net sales for the quarter.
Other key highlights:
 During the quarter, Cipla signed in-licensing deal Gilead for Sofusbuvir,
Ledipasvir, which will allow Cipla to manuifacture and distribute Sofusbuvir,
Ledipasvir (under Cipla’s brand name) in 91 countries.
 Cipla also signed another in-licensing deal with Medicine Patent Pool to allow
generic manufacture of tenofovir alafenamide (TAF), which will allow generic
manufacture of TAF in 112 developing countries. There has also been
marketing collaboration with Teva for its 65 new molecules in S.Africa, which
will broaden Cipla’s offering in S.Africa market.
 Cipla signed out-licensing deal with Salix for Rifaximin complexes patent family
controlled by Cipla, wherein, Salix will make an up-front payment, additional
regulatory milestone payments and royalty. The grant is on world-wise basis,
excluding some countries of Asia.

LINK
http://www.indianivesh.in/Admin/Upload/635515528641536250_Cipla_Q2FY15_Result%20Update.pdf