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  • Stock recommendation: Cipla — Buy — Target price Rs 680

    Publish date: August 9, 2018

    Results update: In-line quarter, US execution key

    Cipla’s June quarter results were broadly in line with the market estimates due to a strong showing by its India business.

    The company’s litmus test in future quarters will depend on how it fares in the United States, especially because it has launched new products in that market.

    For now, though, the US market hasn’t been particularly impressive as the new launches are yet to take off. Supply constraints are one of the reasons for the laggard.

    Key highlights

    • Cipla’s India business was 2% above our estimates at Rs 39 billion. The domestic business grew by 22% (YoY) due to last year’s GST disruption. The two-year comparison shows the business grew by 3%.
    • The US revenues stood at a $100 million, which is $5 million below estimate. We believe that the US market will come into play once the new products gain a degree of recognition. We remain confident that the new launches have good potential because of the company’s healthy approval record in the US.
    • The South Africa market was strong, growing at 23% (YoY). But Africa, as a whole, was disappointing, dropping 2% (YoY).
    • The rest of world figures remained fairly muted at 1% growth.
    • The gross margins were disappointing, falling by 240 bps. The input costs increased by 21% due to higher payments made for purchasing sourcing materials from China.

    Valuation & outlook

    The potential shown by the new launches make us believe that the US market will back up the India business in a few quarters. We feel that the US business will increase to 22% by FY2020 and 25% by FY2021.

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