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Cipla: Forex losses tarnish net - Views on News from Equitymaster

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Cipla: Forex losses tarnish net
Jan 23, 2009

Performance summary
  • Revenues grow by a robust 22% YoY in 3QFY09 due to strong performances by both the domestic and export formulation businesses.
  • EBDITA margins expand by 1.5% led by a fall in raw material costs (as percentage of sales).
  • Bottomline grows by 6% YoY and is lower than the 29% YoY growth in operating profits largely due to forex losses incurred during the quarter (forex gain in 3QFY08). Excluding the impact of the same during both the periods, bottomline registers a superlative 35% YoY growth.

Financial performance: A snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 11,045 13,420 21.5% 31,047 39,038 25.7%
Expenditure 8,422 10,035 19.1% 24,578 29,797 21.2%
Operating profit (EBIDTA) 2,623 3,385 29.1% 6,470 9,241 42.8%
Operating profit margin (%) 23.7% 25.2%   20.8% 23.7%  
Other income 110 185 67.6% 429 524 22.2%
Interest 38 110 187.0% 70 203 188.3%
Depreciation 330 412 24.8% 960 1,200 25.0%
Profit before tax 2,365 3,048 28.9% 5,868 8,362 42.5%
Forex loss/(gain) (132) 426   (417) 2,218  
Tax 390 388 -0.6% 1,075 995 -7.4%
Profit after tax/ (loss) 2,107 2,234 6.1% 5,210 5,149 -1.2%
Net profit margin (%) 19.1% 16.6%   16.8% 13.2%  
No. of shares (m)       777.3 777.3  
Diluted earnings per share (Rs) 16.5% 12.7%     8.9  
P/E ratio (x)*         21.0  
* on a trailing 12 months basis

What has driven performance in 3QFY09?
  • Cipla clocked a robust 22% YoY topline growth during 3QFY09, led by strong performances of both its domestic and export formulation businesses. Domestic sales grew by 11% YoY while the export formulations grew by a healthy 59% YoY. Depreciation of the rupee against the dollar played a part in augmenting the growth of exports. Revenues from the API business failed to impress as the same declined by 20% YoY during 3QFY09 due to lower sales of certain key bulk drugs.

    Business snapshot
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Domestic 5,195 5,781 11.3% 15,342 17,548 14.4%
    - Formulations 3,711 5,907 59.2% 10,973 16,172 47.4%
    - APIs 1,398 1,116 -20.2% 3,632 4,130 13.7%
    Total exports 5,109 7,024 37.5% 14,605 20,302 39.0%
    Total sales 10,304 12,804 24.3% 29,947 37,850 26.4%
    Other operating income            
    - Technology knowhow/fees 748 613 -18.0% 1,275 1,198 -6.0%
    - Others 232 164 -29.3% 525 465.0 -11.5%
    Total 980 777 -20.7% 1,800 1,663 -7.6%
    Total income from operations 11,284 13,581 20.4% 31,747 39,513 24.5%

  • Operating margins expanded by 1.5% largely due to a fall in raw material costs (as percentage of sales) from 46.6% in 3QFY08 to 44.1% in 3QFY09. This was attributed to improved export realisations as also changes in the product mix. Further, impact of the exchange rate also played a part in enhancing margins as exports were booked at the prevailing exchange rates. Other expenditure (as percentage of sales), however, increased by 1% on account of an overall increase in manufacturing expenses, processing charges and sales expenditure.

  • The bottomline grew by 6% YoY and was lower than the 29% YoY growth in operating profits largely due to forex losses incurred during the quarter (forex gain in 3QFY08). The company incurred forex losses to the tune of Rs 426 m during the quarter on revaluation of forward contracts and foreign currency loans subsequent to the depreciation of the rupee against the dollar. Excluding the foreign exchange impact during both the quarters, the bottomline jumped 35% YoY due to a lower tax outgo. The effective tax rate for the quarter was lower at 12.7% (16.5% in 3QFY08) due to tax incentives availed for EOUs, Baddi and the new plant at Sikkim, which commenced commercial production during 1QFY09.

What to expect?
At the current price of Rs 188, the stock is trading at a price to earnings multiple of 12.6 times our estimated FY11 earnings. We believe that Cipla’s focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands. Having said that, in the longer term, the company’s minimal focus on R&D is likely to weigh heavy on its overall growth. Given the attractive valuations currently, we hold a positive view on the stock.

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