Maintain buy with downward revised PT of Rs. 650: The stock has corrected by ~25% from its high and is currently trading at 14.4x its FY2021E earnings. We feel that the domestic business slowdown and the company’s decision to realign distributors (in domestic business) are likelyto affect overall growth of the India business in FY2020E. Hence, we have reduced our sales/profit estimates by 10%/8% and 12%/10% for FY2020E and FY2021E, respectively. However, we feel that all these factors are mostly factored in. We expect the company to report sales and profit CAGRs of 14% and 40%, respectively, over FY2019-FY2021E. Also we feelunlike its larger peers, Cipla faces minimal regulatory woes making it abetter investment option. Hence, we maintain our Buy recommendation on the stock with downwardly revised price target (PT) of Rs. 650.
Q1 results were largely impacted by the realignment of distributors in domestic trade generics and deferral of dispatches in branded domestic formulations. US market growth was driven by gSensipar. The management has maintained its guidance of launching one limited product every quarter in the US. On the Africa front, the company continues to rebase its business model towards private business in the backdrop shrinking tender opportunities. Despite distribution related issues, the management remains upbeat on India growth prospects mainly on the back of promotional (Rx) traction. Across the board transformation from tenderised model to private model in the exports market and from trade generics (Tx) to promotional (Rx) in India is likely to continue for some time. This may have some implications on the quarterly performance. We ascribe a target price of | 520 based on 20x FY21E EPS | 25.9.
Q1: India continues to struggle, core US muted With lower single digit growth in branded drugs of India formulations and uncertainty over the recovery of growth in India generics, we have reduced our sales and EBITDA estimates for FY20E and FY21E. Lower benefits from gSensipar (competitive intensity) and limited visibility of similar profiles of drugs, we expect 13% CAGR in US generics FY19-21E. There was strong reduction (38% fall) of global tender (ARV/malaria) business as well as 14% fall in SA tender business in Q1FY20. With challenging geo-political scenariosthose affects Cipla’s business prospects in key geographies, we maintain‘Reduce’ and decrease our TP to RsRs439 (20.5x PE of FY21E earnings) from Rs475.
Margin improves but revenue impacted by disruption in trade generics In FY19, Cipla finally posted a turnaround in its US business and in FY20 we should witness a full-year impact of this turnaround. The headwinds that have impacted its tender business in FY19 has put this business on a low base and there should be little downward pressure from here on. Cipla’s brand business in India also continues to do well, which it continues to strengthen through in-licencing deals. The trade generic business which was impacted by a reorganization of the distribution channel should see normalcy in the next one or two quarters. The US business continues to progress favourably and the momentum should sustain as they continue to push limited competition launches (one per quarter).
We have retained Buy rating on the stock. In FY19, Cipla finally posted a turnaround in its US business and in FY20 we should witness a full-year impact of this turnaround. The headwinds that have impacted its tender business in FY19 has put this business on a low base and there should be little downward pressure from here on. Cipla’s brand business in India also continues to do well, which it continues to strengthen through in-licencing deals. The channel de-stocking impact knocked of a couple of basis points from Cipla’s FY19 growth, but the phenomenon is now done and the performance should fall in line. We have tweaked our financial estimates based on 4QFY19 financial results and arrived at a target price of Rs653 (from Rs695 earlier) based on 22x FY21E EPS.
Cipla’s US business continues to remain strong driven by ramp-up of key launches with one limited competition product to be launched per quarter. Notably, its US revenue has touched US$125mn in 4QFY19 from US$105mn in 4QFY18 led by new launches. We trim down our sales/PAT estimate by 3.1%/3.5% for FY21E on account of lower India sales and higher tax rate guidance. Rolling over our earnings estimate to FY21E, we reduce our target multiple to 20x (from 22x earlier).However, in light of healthy quarterly performance and increased visibility in the US business, we upgrade our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs650 (from Rs580 earlier).
Q4 was largely driven by one-off gSensipar launched at-risk. The US business has now almost got completely transformed into direct to market (DTM) thus giving the company enough flexibility to leverage on its capabilities in a tough market like US. On the Africa front, the company continues to rebase its business model towards private business in the backdrop of shrinking tender opportunities. India is on course for double digit growth in the long run. This transformation across geographies from tenderised model to public model is likely to continue for some time. This may have some implications on margins initially. We ascribe a target price of | 580 based on 20x FY21E EPS.