Prabhudas Lilladher has issued an “Accumulate” rating on Cipla’s stock, suggesting a target price (TP) of Rs1,615 per share, with the current market price (CMP) standing at Rs1,478. The call reflects cautious optimism in Cipla’s fundamentals, backed by steady domestic demand and strong U.S. market positioning despite anticipated revenue moderation in Q3FY25. Although Cipla’s performance aligns with projections, challenges remain from seasonal impacts and supply constraints in select product lines. In the long-term, targeted launches in the U.S. and growth in respiratory therapies should bolster revenue, making Cipla an attractive option for conservative investors aiming for incremental gains.

Key Highlights of Cipla’s Performance in Q2FY25

In-Line EBITDA and Modest Sales Growth
Cipla’s EBITDA for Q2FY25 reached Rs19 billion, delivering an operational margin of 26.7%. This aligns closely with projections, largely attributed to robust gross margins (GMs) that expanded by 220 basis points year-over-year, reaching 67.1%. Domestic sales saw a subdued increase of 5% YoY due to seasonal effects, while U.S. sales declined QoQ, impacted by supply issues in key product lines like Lanreotide.

Domestic Market Performance
In India, Cipla's formulations market experienced moderate growth, with prescription (Rx) and trade generics both impacted by seasonal patterns. However, notable segments, including cardiac (+11.5%) and respiratory (+8.5%), saw strong traction. Chronic therapies now constitute a stable 61.5% share of Cipla’s domestic portfolio, driven by a well-established market presence and an extensive sales force of 7,800 Medical Representatives (MRs).

U.S. Market Insights and Key Product Performance

U.S. Sales Dip Amid Supply Constraints
Cipla’s U.S. sales in Q2FY25 reached $237 million, a decline from $250 million in Q1. The drop mainly reflects supply issues in Lanreotide, compounded by base business price erosion. However, Cipla continues to maintain a 35% market share in its combined 505(b)(2) and generic portfolio. Approvals for four drugs, including a peptide, were granted in Q2FY25, signaling future growth potential. Cipla’s gAlbuterol market share rose to 19% this quarter, up from 17% in Q1, despite minimal competitive threats.

Strategic Launches to Offset Revenue Decline
Future launches, including gAdvair and gAbraxane, depend on clearance of Cipla’s Goa facility, which is currently undergoing regulatory assessment. These launches are projected to mitigate declines in key U.S. products like gRevlimid and Lanreotide. The company reiterates its commitment to timely launches as a core strategy to stabilize U.S. revenues.

Quarterly Financial Metrics and Long-Term Guidance

Revenue Growth Trends and Forward-Looking Guidance
Cipla’s consolidated revenue increased 6% YoY, totaling Rs70.5 billion, slightly below market expectations due to weaker-than-expected domestic performance. EBITDA margins remain solid, reflecting effective cost management. Despite revised estimates, the management continues to project EBITDA margins of 24.5-25.5% for FY25.

Financial Forecasts and Key Ratios:

Revenue Targets: Rs297 billion in FY26, a 10% YoY increase, with 5.6% YoY growth anticipated for FY27.
Profit Margins: Projected PAT stands at Rs50.7 billion for FY26, delivering an EPS of Rs62.8.
Dividend Yield: Expected to increase modestly to 0.8% by FY27, enhancing shareholder returns.
Valuation Ratios: Currently trading at 23x FY26E EPS, providing a reasonable entry point for investors aiming to accumulate.

Sectoral Performance and Growth Opportunities

Export Markets and Revenue Breakdown
While the domestic market experienced constrained growth, Cipla’s international segments, especially North America and One Africa, have shown resilience. North American revenues dipped 4.8% QoQ but grew 5.2% YoY, while One Africa’s revenues soared 53.7% QoQ. Combined with strong API revenues, which grew by 9% YoY, these sectors provide a robust foundation for future growth.

Revenue Breakdown by Segment (Q2FY25):

Domestic Market: Rs29.5 billion (+4.7% YoY)
International Market: Rs41 billion (+11.7% YoY)
North America: Rs19.8 billion (+5.2% YoY)
SAGA (South Africa and Africa): Rs10.7 billion (+23.9% YoY)
Key Product Launches and Market Share Gains:

gAlbuterol market share expanded to 19%.
Plans to launch niche respiratory products (gSymbicort, gQvar, and gDulera) in FY27.

Strategic Initiatives and Capital Allocation

Research & Development Focus
With an R&D budget constituting 5.5% of revenue, Cipla emphasizes respiratory and peptide research to support long-term growth. Product filings and advancements in generic drugs underscore Cipla’s commitment to innovation, vital for sustaining competitiveness in regulated markets.

Capex and Financial Health:

Free Cash Flow (FCF): Projected FCF growth, with a 2024 FCF of Rs28 billion expected to reach Rs40 billion by FY27.
Net Cash Position: Rs80 billion, offering significant flexibility for potential acquisitions or strategic investments.

Conclusion and Investment Thesis

Investment Strategy and Valuation Insights
At the CMP of Rs1,478, Cipla represents a cautiously optimistic investment with moderate growth potential, suitable for investors seeking incremental returns. Although Q2FY25 posed challenges, long-term growth prospects remain intact, driven by a strong pipeline and strategic expansion in chronic therapies and international markets.

Investors are advised to accumulate shares, with a medium-term price target of Rs1,615. Critical factors to monitor include U.S. launch timelines, market share evolution in high-margin products, and operational developments in regulatory compliance. Cipla’s disciplined approach to R&D and capex, alongside its stable balance sheet, presents a favorable outlook for conservative investors seeking a blend of growth and stability in the pharmaceutical sector.