As expected, Cipla Ltd’s India business did well in the September quarter. The division, whose revenue fell in the June quarter due to inventory liquidation ahead of the implementation of the goods and services tax, reported a 12% rise in sales.

With India generating a large chunk of the revenue, the strong growth had a positive rub-off effect on the company’s overall performance.

Total revenues from operations are up 9%. Operating profit and net profit increased in the range of 18-19% from a year ago. Yet, the performance did little to cheer investors even as the headline numbers are broadly in line with Street estimates. In fact, the correction in the Cipla stock deepened on Tuesday after the results—it was down 7% at close.

Why did that happen? Apart from peer Lupin Ltd’s US Food and Drug Administration setback, one can decipher two reasons. One is the subdued US business. In dollar terms, revenues from North America fell 3% from the year-ago quarter and 4% sequentially, reflecting pricing pressure. In rupee terms, the North America revenue is down 7% from a year ago. Due to lack of major product launches, analysts were not projecting much of a growth. But they were not expecting a revenue drop either.

The second disappointment is the sharp drop in gross margins. In the June quarter, the company impressed the Street with a strong expansion in gross margin to around 66%. Part of the margin improvement then was attributed to a non-repeatable benefit. After excluding this one-time benefit, gross margin is expected to remain at around 64%, according to an analyst with a domestic brokerage firm.

Contrarily, gross margin in the September quarter has seen a sharp reduction—it has narrowed 2.6 percentage points from a year ago and 4.7 percentage points from the June quarter. Margins fell despite a sharp recovery in the India business. According to the management, changes in tax structure have weighed on the margins. Also there are additional expenses related to forthcoming product launches.

Nevertheless the Cipla stock has done relatively well. Even after Tuesday’s loss, the stock is still up 11% from a year ago. In comparison, the BSE Healthcare index is down 9%. A strong India franchise and promise of business expansion in the US (with products that have limited competition) have helped investors keep faith in the stock.

Last month Cipla received approval from the US authorities for a drug with large market potential. Further, in the press statement, the company said it is aiming for more product approvals in the rest of the year, which should lift business in the US. “Our US growth is getting a major boost with initiation of much-awaited product approvals," Umang Vohra, managing director and global chief executive of Cipla, said in a statement.

While the commentary provides comfort, the key now is execution. After the subdued performance in the US in the September quarter, investors will be eager to see the optimism translate into business performance. That will not only add to the revenue momentum but also help Cipla transcend the expected rise in expenditure (research and development) in the second half of the fiscal year and derive better operating leverage.