Improving US outlook, margin gains keep Street positive on Cipla stock

A better than expected performance for the June quarter of the 2023-24 financial year (FY24), robust outlook for the North American market and higher margin guidance led to a 9.6 per cent jump in the stock prices of Cipla on Thursday. Brokerages have also upgraded the earnings estimates of the third largest pharma player -- by market capitalization -- by up to 8 per cent.
 
Q1FY24 results beat estimates as revenue grew 17 per cent year-on-year (YoY) on the back of growth in India and US markets. Margins at the gross and operating levels were higher by 230 basis points (bps), each. While gross margins (64.7 per cent) were higher due to lower raw material cost and superior product mix, operating profit margins (23.6 per cent) rose on account of improved topline/gross margin performance and lower employee costs. The company has increased its operating profit margin guidance -- from 22 per cent to 23 per cent -- for FY24.
 
Lower depreciation led to a 45 per cent increase in adjusted net profit and the same was 25-35 per cent higher than what the Street had estimated. 
 
The company’s performance and outlook in the North American market is an important trigger for the stock. In Q1FY24, the company posted its highest ever quarterly revenue of $222 million for the region, registering a 43 per cent increase.
 
In addition to the traction for the base (generic portfolio), growth in the quarter was led by market share gains in the generic version of cancer drug Revlimid and growth hormone disorder drug Lanreotide.
 
Analysts, led by Bino Pathiparampil of Elara Securities, believe that the upcycle in the US market is manifesting at a faster clip than anticipated. The company highlighted several structural changes in the market, which include prioritisation of steady supply, reduction in generic competition and change in buying patterns of customers which should help generic players, said the brokerage.
 
Elara Securities has upgraded the stock and increased its earnings estimates by 4-7 per cent for the FY24-26 period.
 
The company also plans to launch 4-5 peptides in the near term and has stuck to its FY25 launch guidance for generic versions of Advair inhaler and cancer drug Abraxane.
 
Kotak Institutional Equities expects the company’s US sales to deliver a healthy 10 per cent annual growth over FY23-26. Despite regulatory holdups, the growth is expected to be aided by a better pricing environment and a steady pace of ramp-up across peptides and Revlimid as well as launches of Advair and Abraxane in FY2025, says the brokerage.
 
The company’s confidence on the North American business can also be gauged by the fact that it has increased the geography’s quarterly revenue run rate from $195 million to $210-215 million.
 
The domestic market, which accounts for 44 per cent of revenues, reported a 11.6 per cent growth in Q1FY24. In the branded prescription segment, the contribution from the chronic portfolio was up 200 bps YoY helping boost domestic growth.
 
The company is looking at maintaining its leadership in the trade generics market with new launches (23 products) and by improving its presence across Tier-2 and below markets. Motilal Oswal Research expects the company, which has outperformed industry growth by 350 bps over the last twelve months, to post a 9.5 per cent growth over FY23-25.
 
The brokerage has raised its earnings estimates by 6 per cent, each, for FY24 and FY25 to factor in reduced competition in the US generics segment, better visibility for niche launches in North America and better operating leverage
 
After the rally, the stock is trading 23 times its FY25 estimates and can be looked at on dips.