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Cipla: Margins disappoint again

Jan 21, 2002

Pharma major, Cipla has declared encouraging sales growth of 33% for 3QFY02 which is more or less in line with the street's expectations. However, a sharp slide in operating margins has come as a major disappointment from the company.

(Rs m) 3QFY01 3QFY02 Change
Sales 2,756 3,663 32.9%
Other Income 82 153 86.9%
Expenditure 2,070 2,942 42.2%
Operating Profit (EBDIT) 687 720 4.9%
Operating Profit Margin (%) 24.9% 19.7%  
Interest 3 8 169.0%
Depreciation 40 49 21.3%
Profit before Tax 725 817 12.6%
Other Adjustments - -  
Tax 190 190 0.0%
Profit after Tax/(Loss) 535 627 17.0%
Net profit margin (%) 19.4% 17.1%  
No. of Shares (eoy) (m) 60.0 60.0  
Diluted Earnings per share 35.7 41.8  
P/E (at current price) 28  

Though we were expecting a drop in margins, a 520 basis points slide comes as a surprise especially with increasing contribution from export revenues. This is third quarter in a row, that Cipla has recorded a drop in operating margins. The drop seems to be on the back of rising marketing expenses.

3QFY02: Projected vs. Actuals
Particulars Actuals Projected % Change
Total Sales (Rs. m) 3663 3,608 1.52%
Operating Profit 720 779 -7.61%
Operating Margins (%) 19.7 21.6 NA
Net Profit (Rs. m) 627 671 25.40%

Exports seem to have recorded a healthy growth of 75-80% in line with our expectations. Domestic sales also seem to have grown in line with expectations (13-14%). The company has already started exporting bulk Omeprazole to Andrx. Considering the fact that generic launch by Andrx is expected only in June’02, it is expected to stock up 4-5 months ahead of its launch. The fourth quarter of the current year should see considerable revenue contribution from export of Omeprazole bulk by Cipla. We are expecting Omeprazole export revenues of Rs 677 m (US$ 14 m) in the current year. There is still uncertainty with regard to timing of exports of CFC free inhalers to European and anti-AIDS drugs to the South African markets.

Though insignificant on the net basis, interest burden has gone up sharply in last couple of quarters. This could be due to borrowings by the company for setting up its new formulations plant in Goa at a cost of Rs 1.2 bn. Depreciation expenses also seem to have gone up on that account. However, the company is expected to save on tax outgo due to commencement of the new Goa plant.

At the current market price of Rs 1,168, the stock trades at a P/e of 28 x annualised earnings. Considering a sharp fall in operating margins, we would be revising our earnings estimates downwards. The stock might see selling pressure due to initial disappointment.

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