Cipla Q1 Preview: Domestic business restructuring may moderate profit growth

Cipla will report its quarterly earnings for April-June on July 26.

Drugmaker Cipla Ltd is all set to release its results for the April-June quarter of FY25 on July 26. While US sales are likely to remain steady, a restructuring of the domestic business is expected to moderate the drugmaker's growth momentum.

According to a Moneycontrol poll of nine brokerages, Cipla's revenue is estimated to grow a little over 7 percent to Rs 6,788 crore in Q1FY25, up from Rs 6,329 crore recorded in the same quarter of the previous fiscal. Net profit growth is expected to moderate to 12 percent at Rs 1,116 crore as against Rs 996 crore in the corresponding quarter last year. For context, the drugmaker clocked in profit growth of over 30 percent across all quarters in FY24.

Brokerages on the Street are largely along the same lines when it comes to profit growth expectations for Cipla, with the most optimistic ones predicting around 12 percent on year growth and the most pessimists anticipating a 6 percent increase.

Among brokerages, Sharekhan has forecast the strongest profit growth for Cipla, backed by expectations of a pick up in domestic branded market. In contrast, Kotak Institutional Equities, which projected the weakest growth estimates, anticipates the bottomline to be impacted due to a change in Cipla's distribution model, undertaken in the trade generics segment.

What factors are driving the earnings?

While the drugmaker's US sales are likely to be steady, backed by contribution from the blockbuster cancer drug Revlimid and a ramp-up of other launches, the restructuring of the domestic trade generics segment is expected to dent earnings growth. However, the management is optimistic about mitigating the adverse impact in the coming quarters.

Business restructuring: The Indian pharma market saw recovery in the first quarter of the current fiscal, after a slowdown in demand during the previous quarter. While that is a positive sign for Cipla's domestic sales, the recent changes in the trade generics business model is expected to offset its positive impact.

Brokerage firm Nomura anticipates low single-digit sales growth in the domestic market for Cipla, impacted by disruption in trade generics due to the restructuring, which can lead to inventory drawdowns. Regardless, the management is not too worried as it stated in a previous earnings call that the sales impacted due to the disruption will be eventually recovered in the rest of the fiscal.

Steady US sales: Despite some weakness in domestic sales, the steady performance in the US market is expected to come to the rescue for Cipla yet again in Q1. The drugmaker's US sales are likely to remain consistent, supported by Revlimid contribution, and new launches like  hormone drug Lanreotide, Prabhudas Lilladher said. Kotak Institutional Equities also estimates Revlimid sales to rise marginally to $28 million, slightly higher than $25 million in the past quarter.

Lower trade generics contribution: The restructuring of the domestic trade generic business, which is expected to impact revenue adversely, is also likely to weigh on Cipla's profitability. Accordingly, the poll of seven brokerages estimates Cipla's EBITDA margin at 24.2 percent in Q1, slightly lower than the management's guidance of 24.5-25.5 percent.

What to look out for in the quarterly show?

Analysts and investors will be on the watch out for the management's commentary over the regulatory actions on the company's key manufacturing units. Along those lines, investors will also be anticipating more clarity about the estimated launch timeline for key drugs like Advair and Albuterol, to see if the USFDA regulatory actions have caused a further delay in these launches.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.