Q2FY24 Review: Cipla: Robust US pipeline, but valuations full

30 Oct 2023 , 01:47 PM

Cipla’s Q2 Ebitda margins at 26% were ~300bps ahead of analysts of IIFL Capital Services estimates, driven by higher Chronic revenue share in the India business, further scale-up in high-margin products in the US including Lanreotide/Revlimid and higher PLI income sequentially. While analysts of IIFL Capital Services continue to remain impressed with Cipla’s strong USpipeline execution with Symbicort filing expected in Q3FY24 and 4- 5 peptide launches expected by FY25, they believe current valuations at ~27x FY25 PER (ex-Revlimid) leave limited scope of upside. With the promoter stake sale also lurking in the background, they would recommend investors to play the Cipla story by accumulating Torrent’s stock on corrections (provided Torrent acquires Cipla). Cipla’s FY24 Ebitda margin guidance also implies that margins will moderate from 25% in H1 to 23% in H2, particularly with the expected India business seasonality in Q4. Analysts of IIFL Capital Services upgrade FY24-26 Ebitda by 5/1/2% and maintain their ADD rating on the stock. 

US pipeline visibility remains strong: 

Cipla’s US sales increased QoQ from USD222m to USD229m, with Revlimid sales likely increasing QoQ from USD40m to USD45m and Lanreotide’s MS ramping up to ~20%. While mgmt has guided for USD220-225m US sales for Q3, Cipla is targeting 1 peptide launch in Q3 (market size of USD300-400m) & another 3-4 peptide launches in FY25 (peptide pipeline). Advair/Abraxane site-transfers stay on track, with launches planned in H2FY25. Symbicort clinical trials are completed & USFDA filing is expected in Q3FY24. With a fairly robust pipeline, analysts of IIFL Capital Services expect Cipla to clock 14% Cagr in US sales over FY24-26. 

Organic India business grew 7/8% in Q2/H1, excluding the Rs2.7bn Galvus (Vildagliptin) brand acquired from Novartis in Apr’23 vs reported growth of 10/11% respectively. Although growth in the CHL business was muted in Q2 owing to weak season, TGx (trade generics) business grew double-digits and Rx business benefited from higher Chronic revenue share. Analysts of IIFL Capital Services expect Cipla’s India business to grow in-line with IPM growth of 10% Cagr over FY23-26. 

Although Cipla upgraded its FY24 Ebitda margin guidance from 23% to 24% given the strong performance in H1, margins will moderate in H2 particularly with the expected India acute business seasonality in Q4. Also, other expenses (ex-R&D) have been flat in H1, and Cipla will need to step-up its promotional expenses to drive consistent 10% growth in India, and accordingly, analysts of IIFL Capital Services expect margins to remain flat over FY24-26.