Hold Cipla; on track to meet 20%+ EBITDA margins in'16: Religare

One of India's largest drugmaker Cipla disappointed the street yesterday with the profit numbers coming in below expectations.

Praful Bohra of Religare believes the disappointment in profits was mainly on back of PAT coming in 15 percent below estimates due to miss in sales. Sales were not up to the market expectations because of changes in the distribution policy for the domestic market and the revenues from generic Pulmicort product did not come in Q3.  However, Pulmicort revenues are expected to flow through in the Q4 and so the fourth quarter is likely to look sequentially better.

The house still has a hold on the stock with a target price of Rs 615. He is also confident of the company clocking EBITDA margins of around 20.7 percent for FY16 because in the first half they had performed well and a similar number for FY17 too.

The company yesterday reiterated their revenue growth guidance of 20 percent and margin growth of 20.5 percent for FY16. Domestic sales declined by 0.4 percent to Rs 1,194 crore during the third quarter from Rs 1,199 crore in the same period last fiscal, the company said, adding that business was impacted due to distribution policy changes.Below is the transcript of Praful Bohra’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Latha: How disappointing were the numbers? What exactly was disappointing about Cipla?A: Clearly, the profit after tax (PAT) was around 15 odd percent below estimates and this was driven by sales miss, so sales was also almost 10 percent below expectation. Three reasons for this. One is, they have changed the distribution policy in the domestic market and because of which the growth would have been impacted almost Rs 150 odd crore this quarter. Secondly, one of the products which is Generic Pulmicort, so some revenues are expected to come in from there which has not happened. And that would probably get deferred to fourth quarter. And thirdly, because of the South African Rand (ZAR) depreciations. These three reasons, the revenue miss was there.The second thing is out of these, the domestic and the Pulmicort revenue should get normal in the fourth quarter. So, probably fourth quarter should look sequentially better relatively.Sonia: If you talk about the margins, this time the margins have fallen significantly to Rs 14.5 percent, but as you said, that is because of a change in the distribution policy, etc. even if you adjust it, it is about an 18 percent margin, less than what we have seen in the past. What is your expectations about what the margins could be going ahead in Q4 and whether there is more pressure in store?A: Margins were a miss, so if I were to make all the adjustments, the domestic policy and the Venezuela impact, the ZAR impact, the margins would be trending somewhere around 18 percent and that is what the management also expects, the base business margin should be in this range, at around 17-18 percent. This is definitely lower than what was expected. So, there is almost a 400 basis point miss on the margin front. Even after making all the adjustments. My sense is that the margins should trend somewhere around 20 percent for the next year and that would be probably led because of the Pulmicort sales which are going to come up because as I said, relatively low competition opportunity for them.Secondly, they are also expecting an approval for Generic Seretide, that can probably prop up the margins. So, my expectations for the next year would be somewhere around 20 percent margin. The base business margin of around 18 percent and some prop up because of these two products.Sonia: So, that is 20 percent for the next year, but what about for FY16 because they have reiterated their guidance of 20 percent revenue growth and margin guidance of 20.5 percent for FY16. Do you think the company will be able to meet that guidance?A: Yes, I think so. My expectation for FY16 is 20.7 percent and I think they are on track to meet that because in the first half of this year, we saw very huge revenues from Nexium coming in which was a very high margin product. So, in the first half, they have already done, they are already on track on meeting these numbers. So, I think they would probably be able to meet the number this year.Latha: So, is it a buy, hold for you and target price?A: It is a hold for me and the target price is Rs 615.