Cipla’s Q1 dented by weak India business

Street remains positive on stock, given correction from May highs

Cipla’s June quarter (Q1) was a mixed bag. While revenue growth was subdued because of distributor-level adjustments in India, cost controls and better growth in the US drove operating performance and net profit.

Cipla’s domestic sales (a third of revenues) declined 12 per cent YoY and 10 per cent sequentially, leaving the Street disappointed. It attributed the decline to a conscious decision on realignment of distributors in trade generics. It said secondary performance, however, remained strong across key therapies.

The major boost came from the 67 per cent growth recorded in the US, which accounts for 28 per cent of revenues. Rising contribution from high-margin limitedcompetition drugs also helped gross margins expand by over 10 percentage points (or 1,000 basis points).

Analysts estimate the same was led by generics of Sensipar (a thyroid treatment drug). Sensipar, say analysts, contributed about $30 million ($35 million in the previous quarter) to sales, while the US base business clocked $130 million in sales. The base business (normalised for Sensipar) still grew YoY, highlighted Cipla.

South African operations declined 8 per cent but that was due to lower tender business, which is expected to see a recovery in Q2. The non-tender business continues to outpace the market, growing over twice the industry at 7.3 per cent. Further, the acquired portfolio of Mirren in the OTC space grew over 10 per cent.

On the whole, with the domestic and Africa sales down, it is not surprising that Cipla’s revenues grew just 1.3 per cent YoY in Q1. Operating profit margin improved 426 bps YoY to 22.7 per cent, getting a boost from the US business, which drove gross margins. Cipla received an establishment inspection report for its Kurkumbh plant, which was inspected by the US FDA during March.

While Form 483 for its Bengaluru active pharma ingredient (API) plant — with seven observations — still needs to be resolved, it is not a significant risk.

Given the temporary nature of hit in the Indian and African businesses, and jump in profitability, Cipla’s shares surged close to 4 per cent on Wednesday.

Analysts like Krishnanath Munde at Reliance Securities continue to have a buy rating, even though he will revisit his estimates. However, since the stock has corrected much since its May highs, the overall view of the Street is likely to remain positive.