(Photo: Mint)
(Photo: Mint)

Cipla recoups its strength in the third quarter, but fails to impress the Street

  • The US market— contributing 22% of total revenue— also posted better growth, at about 13% from a year ago
  • Cipla's Q3FY20 sales have improved on better performance in the domestic and US markets, though margins have weakened on rising costs

Steady growth in its domestic pharma business is a welcome boost for Cipla Ltd. After a setback in the first month of the year due to the US Food and Drug Administration observations on its Goa plant, the stock trended lower. A better Q3 show should have perked up the sentiment in the stock when markets are rising. However, better revenues failed to spark enthusiasm in the stock, which traded flat on Wednesday.

Both Cipla’s domestic prescription and trade generics businesses, contributing 41% of total revenues, noted decent growth in Q3. While prescriptions grew 13% year-on-year (y-o-y), trade generics notched 7% y-o-y growth. Overall, its domestic business grew about 13%, higher than the 11% analysts anticipated.

The respiratory and acute segments stood out, given seasonal respiratory infections. Cipla’s chronic segment also grew satisfactorily. In coming quarters, it plans to accelerate allocations to the domestic market as growth rates are improving.

The US market, contributing 22% of total revenue, also posted better growth, at about 13% y-o-y. Analysts were expecting US revenue to fall due to price erosion in certain drugs, but Cipla bucked that trend. However, product launches will play a key role in the US revenue run-rate.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

The firm has not seen many new drug approvals in recent times, so revenue from its US business could be range bound for now. Some of its filings have yet to receive approvals. Price erosion could shave off some revenue growth in the US market if there are no new drug filings.

In South Africa, it has been clocking decent gains in local currency terms. However, slowing growth in emerging markets, down 18% y-o-y, is a worry. Besides, fears of the coronavirus could impact sourcing from China if the epidemic persists for over a month, noted the management. This could impact the supply chain.

Cipla, however, is rationalizing research and development (R&D) expenses. It incurred about 7% of its sales as R&D expenses in Q3, but the management indicated that they are coming off the peak. While some of this would depend on new drug launches, indications are that the firm could make some gains here.

Although the gains in the domestic and overseas markets have been good, it seems to have come at the cost of margins. Despite 9% y-o-y revenue growth, Cipla’s operating parameters have not risen much. In fact, earnings before interest, tax, depreciation and amortization margins contracted to 17.3% in Q3, down 40 basis points y-o-y.

Nevertheless, the Cipla stock quotes at a price-earnings multiple of 21.6 times its trailing 12-month earnings. The company will require higher growth and margin persistence if this multiple is to expand.

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