Cipla maintains BUY; raises FY24 margin guidance to 23%

Cipla’s Q1FY24 performance was a beat on all fronts, driven primarily by swift uptick in the core markets of India (up 12%) and US (up ~9% QoQ). gRevlimid continues to be an important product in the US, though traction in Q1 was driven by volume growth in the base portfolio. Launch timeline of gAbraxane and gAdvair in FY25 remains unchanged, though gAdvair may be launched earlier if Indore facility status is not escalated to an ‘official action indicated’ (OAI). In India, MR addition in branded generics and strong position in trade generics and consumer health will likely drive 10% growth over FY23-FY25E for Cipla. Management has raised its FY24 margin guidance by 100bps to 23%. We raise our FY24E and FY25E EPS by 6.7% and 4.4% respectively. Maintain BUY while we raise the target price to INR 1,300, valuing the company at 23x FY25E earnings.

US and India outperformance drives beat
Revenues grew 17.7% YoY to INR 63.3bn (I-Sec: INR 60.3bn) driven by strong traction in the US markets and India. Gross margin expanded by 232bps YoY (+61bps QoQ) led by new launches in the US and product mix improvement. EBITDA margin expanded 233bps YoY to 23.6% (I-Sec: 22.4%) on the back of product mix improvement. Adjusted PAT was up 45.1% YoY to INR 10bn (I-Sec: INR 8.2bn).

FY24 margin guidance raised to 23%
Domestic revenues grew 11.6% YoY to INR 27.7bn with branded / trade generics / consumer health growing at 11% / 8% / 16% respectively. Strong traction in chronic therapies and presence in high-growth areas of trade generics and consumer health should aid growth going forward. Cipla added 200 MRs in India in Q1FY24 and will add 150-200 more in Q2. We believe the company’s India business will grow at 10% over FY23-FY25E. US continues to touch newer highs – revenues were up 8.8% QoQ to USD 222mn, driven by market share gains in Lanreotide and volume growth in the base portfolio. Favourable macro-environment (drug shortages and favourable competitive dynamics) and attractive product pipeline is likely to ensure that the momentum is maintained ahead. We expect US business to register a CAGR of 20% over FY23-FY25E to USD 1bn. South Africa (including Global Access) business declined 5.1% YoY (-10.1% QoQ) to INR 7.5bn.

Valuations and risks
Cipla’s US business growth in FY24 could have been impacted due to shift in launch timeline of gAbraxane and gAdvair; however, shortages of generic drugs due to bankruptcy of a few companies drove traction in the base portfolio, thereby safeguarding the company’s FY24 growth. In India, Cipla is also adding MRs and launching new products across its three business segments to drive market-beating growth. Growth across the core markets also improved its EBITDA margin in Q1 and the favourable product mix is likely to elevate it to ~25% by FY25E.

We increase our revenue estimates by ~2% over FY24E-FY25E to factor-in the healthy US business growth. We also raise our EPS estimates by 4-6% over the same period to account of the improvement in margins and cost efficiencies. Better performance in the key geographies of US and India may aid a revenue CAGR of 12.3% over FY23-FY25E while EBITDA and PAT will likely grow at 19.1% / 24.2% over FY23-FY25E. At CMP of INR 1,069, the stock currently trades at valuations of 22.8x FY24E and 19.0x FY25E earnings and EV/EBITDA multiples of 12.9x FY24E and 10.6x FY25E. Retain BUY. Risks: Incremental competition in niche products, delay in facility resolution.

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