With an Adj. PAT of Rs3.82bn (58%YoY), Cipla’s Q1FY13 results surpassed Edelweiss' expectations. Revenue growth of 23%YoY was led by a robust growth in domestic sales and upsides from Lexapro supplies (~USD15mn). EBITDA margins at 27.6% were up 500bps YoY with ~250bps benefit coming in from higher currency realizations. Edelweiss believes that EBITDA margins on a constant currency might sustain at 25% in FY13, an improvement of 250bps over FY12. The management has raised revenue guidance to 12%-15% for FY13 while PAT growth might be higher. Edelweiss raises FY13-14E EPS by 10%-15% respectively and hike TP to Rs410.

Strong all round performance: Domestic biz drives revenue growth

Revenue growth of 24% YoY was led by a sharp 30% growth in domestic sales. While export formulations grew 23%YoY, ex-ARV business exports expanded 36%YoY. EBITDA margins grew 500bps YoY, led by higher currency realizations (~250), generic Lexapro supplies (~150bps) and higher growth in domestic business (~100bps).

Restructuring in domestic business aids higher growth

Growth in branded formulations was 24% YoY, a significant uptrend from 16%-18% in the last two quarters. However, Edelweiss believes that the current sharp momentum (30%YoY) may not continue as generic-generic business (10%-12% of domestic sales) grew by more than 80%YoY. Edelweiss expect domestic to grow at 18% over FY13.

Dymista to be the next trigger for export formulations

Cipla is the sole supplier for the recently approved drug Dymista for Allergic rhinitis. It is entitled to USD15mn milestone payment, royalty on sales and supply of formulation to the innovator (Meda). Potential supplies will start from Q3FY13 with meaningful upsides coming in from FY14 onwards.

Outlook and Valuations: Positive growth catalyst; upgrade to ‘BUY’

A strong growth trajectory in the domestic market, higher realizations and a potential upside from Dymista launch have resulted in a 11%-14% upgrade in Edelweiss' FY13/14E earnings. They expect an earnings CAGR of 23% over FY12-14E, driven by 17% revenue growth and 135bps margin expansion. Key risk to their call is the impending pricing policy.