Cipla reported a strong Ebitda margin improvement (excluding other operating income) for the quarter. At 17.7%, margins were up c458bp q-o-q and c40bp above HSBCe, driven primarily by better product mix and better rationalisation of manufacturing and procurement expenses.
Reported Q1 FY15 net profit was R290 crore (down 39.3% y-o-y), and net sales came in at R2,650 crore (up 13.6% y-o-y) in line with HSBCe. In the quarter, Cipla had won tenders worth ZAR300m in South Africa in new therapies such as respiratory, mental health, cardiac and women’s health — a shift change from traditional tenders in anti-retrovirals. Tender sales now form less than 10% of export sales.
We believe margin improvement on continued cost rationalisation, better growth in India formulations, and higher margin sales in tenders are likely, as per guidance. Major potential share price catalysts also include approval or launch of combination inhalers in some EU markets. Our net EPS forecast change post-revision is c1% in FY15e and c18% in FY16e. We value Cipla at 22x (earlier 20x, close to the current trading multiple) to arrive at our new target price of Rs 522. We upgrade to overweight from neutral.