Declining India business pulls down Cipla's Q1 growth; US sales grow

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

Cipla’s domestic sales (a third of revenues) diasppointed after declining 12 per cent year-on-year and 10 per cent sequentially. The company attributed the same to a conscious decision on realignment of distributors in trade generics. According to Cipla, the secondary performance, however, remained strong across key therapies with Respiratory and Cardiology segments outpacing the market. 

The major boost came from a 67 per cent growth in the US sales, which account for 28 per cent of overall revenues. Rising contribution from high-margin limited competition drugs also helped gross margins expand by over 10 percentage points (or 1,000 basis point; bps). Analysts estimate the same was led by generics of Sensipar (a thyroid treatment drug). Sensipar, according to analysts’ estimates, contributed about $30 million ($35 million in previous quarter) to sales, while the US-based business clocked $130 million in sales. The base business (normalised for Sensipar) still grew year-on-year, highlighted Cipla. 

The South Africa business 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 and grew over 2 times the industry value at 7.3 per cent. Also, the acquired portfolio of Mirren in the OTC (over-the-counter) space grew by over 10 per cent.

On the whole, with the domestic and Africa sales down, it is not surprising that Cipla’s revenues grew by just 1.3 per cent year-on-year in Q1. The US business driving gross margins, though, meant that operating profit margin improved 426 bps year-on-year to 22.7 per cent.  

Cipla received an EIR (Establishment Inspection Report) for its Kurkumbh plant, which was inspected by the US FDA during March, indicating a regulatory clearance for this key facility. 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 the hit in India and Africa business and overall jump in profitability, it is not surprising that Cipla’s shares surged nearly four per cent on Wednesday. However, some tweaking of FY20 estimates by analysts isn’t ruled out.

Analysts such as Krishnanath Munde at Reliance Securities continue to have buy rating on the stock, even as he will revisit his estimates. However, since the stock has corrected significantly since May highs, the overall view of the Street is also likely to remain positive.

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