Timely new launches, India outperformance key for Cipla’s margin gains
While the March quarter performance was slightly below estimates, the stock gains were on the back of multiple new launches, improved outlook, and higher margin guidance for financial year 2025.
Revenues in the quarter were up 7 per cent year-on-year, while operating profit gained 12 per cent, missing Street estimates. Adjusted for one-off gains, the net profit was up 22 per cent and was boosted by higher other income and lower interest costs.
Revenue was led by steady growth in the US market, which was up 12 per cent year-on-year. This was due to improved demand in peptides, respiratory products, and sales of the generic version of the cancer drug, Revlimid. The active pharmaceutical ingredients business led on the sales front with a growth of 42 per cent, while the domestic sales were up 7 per cent year-on-year.
On the profitability front, the company posted a gross margin expansion of 270 basis points year-on-year to 66.7 per cent, led by falling raw material costs and was ahead of brokerage estimates. However, the gains at the gross levels did not flow through to the operating level. Operating profit margin rose by 90 basis points to 21.4 per cent and was weighed down by higher employee costs, research and development expenses, and other costs.
While operating profit margins for Q4 FY24 were lower than analyst expectations, what surprised the Street was the higher than expected operating profit margin guidance of 24.5 per cent to 25.5 per cent for FY25 and the same does not factor in USFDA compliance at the Goa site. The company had ended FY24 with a margin of 24.4 per cent. The higher margin guidance is on hopes that outsized gains from new launches in the US market and outperformance in the India and the South African markets will drive the performance at the operating levels.
The North American market is expected to grow on the back of new launches while the base portfolio could grow at a normalised rate. The company has a strong portfolio with a couple of respiratory assets to be filed over the next 12-15 months in addition to four to five peptides expected to be launched in FY25.
Given the delay in some key launches like generic versions of Advair (asthma) and Abraxane (cancer), which have been pushed by at least 2-3 quarters, Param Desai and Kushal Shah of Prabhudas Lilladher Research believe that the timely launch of five peptides (guided for FY25) will be a key factor. The brokerage has maintained an ‘add’ rating on the stock (target price of Rs 1,405 a share) and believes that further FDA escalation to the Indore unit and erosion in key products in the US will be key risks to its rating.
While the generic version of Revlimid contributed meaningfully to overall earnings for FY24, Motilal Oswal Research expects a 12 per cent earnings growth over the FY24-26 period. This would be largely driven by the commercialization of complex assets in the US and outperformance of chronic therapies in the domestic formulations segment, a transformed operating model in trade generics, and sustained growth in the consumer healthcare segment. The brokerage has a ‘buy’ rating on the stock with a target price of Rs 1,600 a share.
First Published: May 14 2024 | 12:59 AM IST