Cipla stands out in a gloomy sector as revenue swells 15% to Rs 16 bn

Improving prospects of US business to drive the company's earnings

Drug major Cipla’s December quarter (Q3) performance was much better than peers Lupin and Dr Reddy’s.
 
While net profit for Dr Reddy’s and Lupin declined 29 per cent and 65 per cent year-on-year (y-o-y), respectively, in the reporting period, led by declining US sales and tepid growth in India, that of Cipla grew 7 per cent y-o-y at Rs 4.01 billion.
 
The robust 15 per cent India growth (40 per cent of Cipla’s top line) lifted its overall performance. Lupin and Dr Reddy’s had reported a mere 7.8 per cent and 3 per cent y-o-y growth in India sales, respectively.
 
The African subcontinent — about a fifth of Cipla’s top line — also grew 6 per cent, clocking its highest-ever quarterly sales. US sales declined 2 per cent y-o-y due to the pricing pressure.
 
For Lupin, its North America business (over a third of its sales) was down 34 per cent y-o-y in Q3; Dr Reddy’s was down 3 per cent.
 
For Cipla, the US is still a relatively smaller revenue contributor (17 per cent) and the company being a late entrant is now ramping up its pipeline in the world’s largest health care market. As filings for new products are gaining pace, Cipla said its focus on building a strong specialty portfolio for the US continued, with certain products in the neurology and respiratory spaces in advanced stages of discussion.
 

Cipla’s respiratory segment has always been looked at by the Street with optimism. Besides, the company’s approval and launch of generic Pulmicort respules (steroidal inhalation product for asthma) is encouraging. Another limited competition generics of Dacogen (for myelodysplastic syndrome), too, has been introduced. With the US launch trajectory getting a boost with key limited competition products, the company saw its North America sales growing 5 per cent sequentially.
 
Other smaller contributors such as Europe and the active ingredients’ segment reported good growth, which was partly offset by a decline in emerging market sales.
 
Cipla’s Q3 revenues at Rs 39.14 billion grew 7 per cent y-o-y. Operating profit at Rs 8.19 billion surged 21 per cent, with margins expanding 230 basis points (bps) y-o-y and 120 bps sequentially to 20.9 per cent. In fact, the improving operating performance in the last few quarters, after lumpiness in FY17, instils further confidence.
 
The cost optimisation measures continue to benefit. Expenses such as those on raw materials, employees, other expenses, and finance costs (as percentage of sales) declined during the reporting quarter. However, certain one-offs related to changes in US tax rates and drop in value of intangibles for the US affected net profit.
 
Adjusted for one-offs, net profit grew 25 per cent y-o-y.
 
Cipla’s share price closed at Rs 570 on Wednesday, up 0.73 per cent.
 
Ranjit Kapadia at Centrum Broking said Cipla reported a good quarterly performance. He maintains his ‘buy’ rating on the stock. Kotak Institutional Equities has Cipla among its top picks in the sector.