Cipla Ltd’s June quarter results show that its India business is on a sound footing. How an increase in costs plays out and the extent to which US sales growth improves are the uncertainties that will play a key role in determining how it does in the rest of FY19.

The company’s India business saw sales grow by 21.6% from a year ago, partly due to a low base. Growth will taper a bit in the September quarter and should then stabilize at normal growth rates. However, its US business growth slowed down despite launches of products with good potential. It will take some time for sales from new products to ramp up. Meanwhile, discontinuation of some lower-margin products has affected sales growth. Supply constraints also affected sales. While these were expected, the transition to selling products directly and ramp-up of sales from new products may see these gaps continue for some time. Cipla’s success in getting new approvals does lend confidence to its view that US sales will ramp up.

When that happens, gross margins should also benefit. The June quarter saw sales grow by 12% but input costs rose by 21%. The company said higher costs of sourcing inputs from China, higher commodity costs (such as crude oil) and change in inventory contributed to this decline. While the inventory element is an accounting figure, the spike in costs could continue. Tiding over that depends on the product mix improving, so that sales of more profitable products absorb cost increases. A higher-margin product mix depends on the US market to a large extent.

In Africa, Cipla saw good growth during the quarter, and a launch of a biosimilar product is scheduled for the second quarter. Its acquisition of an over-the-counter should add to revenue growth.

While its input costs increased, Cipla’s Ebitda (earnings before interest, tax, depreciation and amortization) margin remained stable and increased by 10 basis points from a year ago. Its net profit for the quarter rose by 4.9% from a year ago.

What can we expect going ahead? The supply constraints in the US market have ended, so growth should recover to that extent. While a ramp-up of sales from new products will add to sales, rationalization may still hold back sales growth in FY19. However, as the contribution of new products increase, Cipla’s gross margin should benefit.

The company has also adopted a model of licensing products such as biosimilars, to sell in India and other markets. These should also begin to add to revenues and margins eventually. If input costs keep increasing, that’s a risk to watch for. Cipla’s shares are up by 7% in the past three months and were up by 0.8% on Wednesday, after its results were announced.

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