In line with its peers, Cipla Ltd’s shares have underperformed the benchmark indices over the last one year. From the looks of it, the March quarter (Q4 FY18) results provide no major reason to reverse this trend. Revenues expanded by a lacklustre 5% and gross margin narrowed both from a year ago and from the preceding quarter.

Performance in the US business was not as strong as the management’s projections. Revenues from the US market stood at $105 million (up 8% year-on-year), not significantly higher than the $100 million revenue the company clocked in the December quarter. Product recall and supply issues impacted sales in the US (to the tune of $5 million). Also according to Purvi Shah, an analyst at Sharekhan Ltd, pricing pressure hurt performance. Revenues in the sub-Saharan Africa lagged and emerging markets remained flat.

On the positive side, the management guided for a double-digit growth in the India business in fiscal year 2019 (FY19). This business, which generates 39% of Cipla’s revenues, grew 6% in FY18. The drug maker expects the in-licensing deals with innovator companies, focus on certain therapeutic segments and sales force productivity optimization measures to aid growth in India.

Answering an analyst’s question, the management also alluded to double-digit revenue growth in the US in FY19, helped by the ramp-up of recent product launches. Further, the management guided for a strong product pipeline, indicating one new limited competition product launch every quarter.

The commentary should keep growth hopes alive. But more clarity on the quantum of the growth pickup and profitability level will be needed to gauge the earnings trajectory. As of now, this remains hazy.

Sales in the US will remain subdued in the current quarter also, as supply issues are expected to be resolved only by the end of this month. Also, price erosion in the US generics market remains an issue.

“The US generics pain is unlikely to subside anytime soon despite optimistic commentary from the management due to the growing number of USFDA approvals," ICICI Securities Ltd said in an industry report, adding: “The approval momentum has gone up from ~500 (average of FY12-17) to ~780 for FY18. This will further erode base business growth of existing players." USFDA stands for the US Food and Drug Administration.

Also, given the focus on new product launches and the development of the product pipeline, analysts are sceptical if Cipla will be able to contain costs and maintain profitability. The company’s management aims to cap research expenses as a percentage of sales at current levels. It expects incremental revenues to be sufficient to cover expenses.

Much depends on how the optimistic management commentary translates into revenues and earnings for Cipla. The coming two quarterly results will be a test.

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