Weak domestic sales hurt Cipla in Q4

Sales from this segment account for the largest share in revenue

Cipla’s lower-than expected performance in the March quarter comes at a time when the sentiment for the pharmaceuticals sector is already weak. Stocks across the pharma pack cracked on Thursday, and Cipla, too, lost more than three per cent to close at Rs 504.10, even as results were declared after market hours. The below-par results could thus weigh on the stock on Friday.

Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 480 crore came way below the Rs 688 crore, indicated by the Bloomberg consensus estimate; Ebitda margin fell to 13-14 per cent levels. This is a big disappointment, given the margin improvement seen in recent quarters — from 16.7 per cent in the June 2016 quarter to 18.6 per cent in the December 2016 quarter. 

Operating Ebitda was Rs 506 crore, including other income. But, even then, it was short of expectations. Cipla, however, said the quarterly results are off the mark due to a tough operating environment and certain one-offs and it delivered on its goal of improving base Ebitda percentage over a year by more than 200 basis points (bps).

The one-offs included Rs 56-crore provision for loss on certain assets of subsidiary Cipla BioTec Private and Rs 214.4 crore towards one-off charges related to impairment of a part of intangibles from the US acquisition. Adjusting for these one-offs, the net profit would have come at Rs 208.6 crore and would have still been much lower than the Rs 338-crore consensus estimate. 

Revenue at Rs 3,582 crore, too, was lower than the estimate of Rs 3770 crore. Cipla, which gets the largest share of revenue from the domestic segment (38 per cent in FY17), saw India sales decline in the March quarter. This was largely responsible for the performance falling below expectations and impacting margins. Although domestic sales grew 10 per cent in spite of challenges in new product pricing and note ban, the decline is a worry. The fourth quarter is traditionally weak. The impact of destocking ahead of the implementation of the goods and services tax (GST) will be a concern in the June quarter, too.

US sales (a fifth of revenue), however, marked a 33 per cent growth but were helped by acquisitions of Invagen and Exelan. The company is building its pipeline and after having filed 32 ANDAs, much ahead of the forecast of 20-25, it plans filing at least 20 more in FY18. This will drive its US growth. But the big trigger will be the high-potential respiratory portfolio. Cipla is making respiratory filings in the US and the benefits will accrue over time. In the near term, the Street is looking at the respiratory launches in Europe, especially in the combination inhalers. Cipla has already got approval for Seroflo inhaler in the UK and more are awaited. All this should provide some cushion to the stock.