Cipla hits five-month low on weak outlook; down 12% in two days

Shares of Cipla hit a five-month low of Rs 534, down 5% on Tuesday, extending its Monday’s 7% decline on the BSE, due to the weak outlook for the second half of the current fiscal (H2FY19). The pharmaceuticalmajor said there was pressure on the tender business, supply disruptions, commodity inflation and business impact from countries hit by sanctions.

The stock was trading at its lowest level since June 6, 2018. It has slipped 16% in the past six trading sessions from Rs 635 on October 29, 2018. It touched a 52-week high of Rs 678 on September 19, 2 018.

Cipla has posted an 11% year-on-year (y-o-y) decline in its consolidated net profit at Rs 3.77 billion for the September quarter (Q2FY19). Total revenue from operations has been down 2% y-o-y to Rs 40.12 billion. Analysts on an average had expected a profit of Rs 4.71 billion on revenue of Rs 43.94 billion for the quarter.

EBITDA (earnings before interest, tax, depreciation and amortization) margin declined to 18.8% from 19.7% in the previous year quarter, due to poor business mix.

“More than the reported numbers, the disappointment was mainly due to the weak H2FY19 outlook resulting from a combination of supply issues and geopolitical turbulence that are affecting businesses in multiple markets across the Middle East,” an analyst at Emkay Global Financial Services said in result update.

Cipla also continues to suffer from being a late entrant to the US market, with even its complex and niche opportunities likely to enjoy smaller-than-anticipated tail values, the brokerage firm said with ‘hold’ rating on the stock.

“More than the Q2FY19 numbers, the qualitative guidance highlighting the challenges is disappointing, considering that factors like capacity rebalancing point to poor execution, in our view. The cost rationalization measures taken by Cipla in the last 18 months are unlikely to reflect in the financials as loss of revenue from tender markets and some EMs besides industry-wide input cost issues will lead to margin pressures,” an analyst at Antique Stock Broking said in Q2FY19 result review.

“Cipla's premium was built on the two-pronged approach of growing the high margin domestic and the US business along with cost rationalization would lead to 20%+ margin in FY20. However, with no visibility on EM and institutional business, a large part of margin expansion may be cannibalized by operating de-leverage,” the brokerage firm said with downgrade rating to 'Hold'.

According to analysts at Prabhudas Lilladher, Cipla was expected to outperform consensus estimates driven by seven launches in US and traction of complex generics. There was a strong reduction (50% fall y-o-y) of global tender (ARV/malaria) business as well as 20% fall in South Africa tender business.

With the challenging geopolitical scenarios, those affects Cipla’s business prospects in key geographies, we reduce estimates of sales by 5-6% and EBITDA margin to 16-18% in FY19E and FY20E. Management, however, remained optimistic on revenue growth in the US and India in FY19E without specific quantification, the brokerage firm said with ‘reduce’ rating on the stock and target price of Rs 417.