Cipla hits record high on strong Q1 result; Morgan Stanley sees 30% upside

Mumbai headquartered pharma firm posted 20% growth in profit before tax for the first quarter of the current financial year to Rs 799 crore, on a 9% YoY growth in revenues to Rs 4,346 crore

Shares of Cipla advanced 11.7 per cent to Rs 814.45 -- also its record high -- on the BSE on Monday after the pharmaceutical firm reported healthy June quarter numbers on Friday post market hours. Mumbai headquartered pharma firm posted 20 per cent growth in profit before tax (PBT) for the first quarter of the current financial year to Rs 799 crore, on a 9 per cent year-on-year (YoY) growth in revenues to Rs 4,346 crore.

On the operational front, the Ebitda came in at Rs 1,049 crore with a resulting Ebitda margin of 24 per cent with focus on cost optimisation across businesses. The profit after tax was Rs 578 crore, up 21 per cent from Rs 447.15 crore posted in the same quarter a year ago.

The company’s domestic business did well, registering a 16 per cent YoY jump during the quarter when Cipla launched the licensed version of Gilead’s remdesivir. It also markets another key drug used in Covid treatment, Roche’s tocilizumab. In the chronic therapies, cardiac segment did well for Cipla during the quarter, growing by 10 per cent. The trade generics business clocked a 46 per cent YoY jump.

"The India business grew by 16 per cent YoY and the Branded Rx business grew by 9 per cent YoY, led by chronic therapy growth offsetting the subdued acute business. The previous year was on a low base as it had the impact of restructuring in trade generic business. The contribution of Covid-19 medicine as of now is negligible as the sales began only in July. We expect Remdesivir and Faviparavir to add about Rs 125 crore to the quarterly sales run rate going forward," said analysts at Nirmal Bang Institutional Equities in a report dated August 10. 

The brokerage has revised its estimates on Cipla for FY21 and FY22 to account for the revised outlook on operational costs, build forecast for Covid19 related opportunities like Remdesivir and Faviparavir in our numbers. "Based on our revised estimates, we recommend an Accumulate on Cipla with a target price of Rs 773 (from Rs575 earlier) based on 23x FY22 EPS," the report said.

"Extremely pleased to report our Q1FY21 performance which reflects the inherent strength of our business backed by agile and resilient operations, cost control initiatives and continued delivery on our strategic priorities... During the quarter, our businesses actively re-imagined their operating models to drive strong growth across markets of India, South Africa, US and focused execution on cost optimization helped drive the quarter EBITDA to 24 per cent,” said Umang Vohra, MD and Global CEO in a statement.

Cipla’s US business grew by 14 per cent YoY led by the ramp up in sales of inhaler drug albuterol. The South Africa business registered a 17 per cent jump, while the European business grew by 9 per cent.

"Cipla’s sales for the quarter were largely in line with our estimates. However, it delivered a strong beat on earnings owing to significant reduction in opex. Covid-19-led disruption has enthused the company to reimagine the business, to sustain cost saving and enhance resource productivity," said analysts at Motilal Oswal Financial Services. The brokerage has raised its EPS estimates by 19 per cent/14 per cent for FY21/FY22 to factor above market growth in Trade Generics (Gx), ramp-up in Albuterol Sulfate sales, and cost saving benefits. They have raised their price target to Rs 790 with a 'Neutral' stance on the stock "as the valuation factors potential upside in earnings over the medium term".

Those at HDFC Securities, on the other hand, believe that Cipla’s Q1 results were strong driven by good growth across regions and higher than expected cost savings. "With strong traction in US (ramp up in Albuterol, niche launches), good growth in India (Rx business outperformed IPM growth for past four quarters, benefits of One-India strategy, Covid portfolio) and reduction in costs (good part of cost savings are likely to sustain owing to digital initiatives) margins are set to structurally improve," they said in a post-result report. They forecast 400bps of margin expansion over FY20-22 and have increased their FY21/22e EPS estimates by 22 per cent/13 per cent to factor lower costs and strong revenue momentum.

Meanwhile, global rating agency Morgan Stanley believes that better growth visibility (23 per cent EPS CAGR for F21-23) through monetisation of complexgenerics such as albuterol; strong balance sheet with zero net debt and continuing free cash flow generation; and improving industry dynamics,especially in the US generics market are some of the key factors that make the stock extremely attractive. 

"Stock is trading at 23xF22e EPS, which implies that it is pricing in the near-term earnings growth and upside from ‘in market’ complexgenerics like albuterol inhalers. However, medium-term growth beyond F22 does not appear to be in the price, and neither does upside from key respiratory drugs in the pipeline. Cipla could potentially accelerate EM growth with in-licensed biosimilar portfolio, which does not appear to be priced in the stock," it said in a report dated August 9.

The brokerage has revised its bull-case target price to Rs 943 per share, seeing around 30 per cent upside from Friday's close of Rs 728.6. In it's bear-case scenario, the brokerage has pegged target price at Rs 573, a downside of 21 per cent. As regards its base case, the taerget price is set at Rs 847. 

"An 11.3 per cent sales growth driven by better-than-industry growth in the domestic market, steady growth in South Africa driven by the private business, a few limited competition launches and albuterol ramp- up in the US. OPM at 21.8 per cent in F23e (vs. 18.7% in F2020) and 19% EPS growth over F2022-23e support the base case target price. However, setback in core business (including Covid-19 impact) led by slower growth in the domestic market (Rs238/share), NPPA overcharge issue (Rs19/share) and slowdown in DPI regulatory progress (Rs17/share) may limit the upside, leading to our bear-case price," it said.

"Cipla’s broad-based revenue surprise backed up by management commentary on significant cost savings in post Covid-19 world has triggered earnings upgrades and reinforces our positive view. Along with gAlbuterol launch, Cipla has 2-3 inhaler filings and starting clinical trials on 2 more – underlining significant medium term value creating potential of this niche portfolio. US growth is backed up by steadily improving India performance and initial signs of likely bottoming out of non-US exports. Strong track record on cost control is another positive and delivering on recent cost control guidance can drive earning upgrades," said analysts at IDFC First Capital. They maintain 'Outperformer' rating on the stock with a taregt price of Rs 815 (14x FY22E EV/EBITDA/ 26x FY22 PER).

At close, the stock settled 9.5 per cent higher at Rs 797.5 on the BSE, as against 0.37 per cent gain in the benchmark S&P BSE Sensex. A total of 58.73 million shares changed hands on the counter on the NSE and BSE on Monday.