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Cipla: Strength continues

Jan 24, 2005

Performance Summary
Domestic pharma major, Cipla, declared its 3QFY05 and 9mFY05 results. The topline grew by 24% during the quarter led by a good performance in both formulation exports as well as in the domestic pharma market. The bottomline has grown by 67%, which was basically boosted by higher other income and lower tax incidence.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 4,806 5,961 24.0% 13,580 17,069 25.7%
Expenditure 3,706 4,757 28.3% 10,712 13,478 25.8%
Operating profit (EBDITA) 1,099 1,205 9.6% 2,868 3,591 25.2%
Operating profit margin (%) 22.9% 20.2% 21.1% 21.0%
Other income 89 412 365.3% 236 605 156.7%
Interest 40 12 -68.8% 68 66 -4.1%
Depreciation 90 128 41.7% 265 383 44.3%
Profit before tax 1,058 1,477 39.5% 2,770 3,748 35.3%
Tax 305 220 -27.9% 650 740 13.8%
Profit after tax/(loss) 753 1,257 66.8% 2,120 3,008 41.9%
Net profit margin (%) 15.7% 21.1% 15.6% 17.6%
No. of shares (m) 300.0 300.0 300.0 300.0
Diluted earnings per share (Rs)* 10.0 16.8 9.4 13.4
P/E ratio (x) 20.6
(* annualised)

Whatís the companyís business?
Cipla is the largest pharma company in the retail market according to the latest ORG survey. The company has presence in formulations and bulk drugs manufacturing. All the bulk drug manufacturing facilities of the company have been approved by the US FDA and the formulation facilities have been approved by the Medicine Control Agency - UK, the Medicine Control Council - South Africa, the Therapeutic Goods Administration - Australia and other international agencies. On exports front, the company has strategic alliance with major generic manufactures such as Watson, Mylan, Barr and Ivax for supply of bulk drugs. It has a very wide product range in domestic market, which includes antibiotics, anti-bacterial, anti-asthmatics, anti-inflammatory, antiretroviral, anthelminites, anti-cancer and cardiovascular. In domestic formulation market, antibiotics are the mainstays. It also concentrates on developing specialty bulk drugs for export markets.

What has driven performance in 3QFY05?
Outperforms the domestic market: Domestic sales grew by 12% in the quarter against 7% growth in the market according to ORG survey. Export of formulations has doubled, led by higher contribution from the European and some semi-regulated markets. The Anti-AIDS, anti-inflammatory, anti-ulcerants, and anti-dedprresants segments have performed well. However, supply of API's has shown decline of 27% in 3QFY05 basically due to lower API supply to the regulated markets. Exports now contribute 46% to the companyís revenues (40% in the same quarter last year).

Business snapshot
3QFY04 3QFY05 % change
Domestic 2,996 3,354 12.0%
Exports
Formulations 998 2,079 108.4%
APIs 1,069 774 -27.6%
Total exports 2,067 2,853 38.0%
Total sales 5,062 6,207 22.6%
Other operating income
Technology knowhow/fees 102 143 40.7%
Others 62 64 3.1%
Total 164 207 26.5%
Total income from operations 5,226 6,414 22.7%

Operating margin expands: While there was a strong growth at the topline level, margins suffered due to higher costs. Raw material costs increased by about 34% YoY (against sales growth of 24%). The basic reason cited by the company for higher raw material consumption is change in product mix and lower sales of APIís to regulated markets. Other expenses have also gone up due to higher expenditure on sales and distribution front.

Cost break-up
3QFY04 3QFY05 % change
Raw Material 2,322 3,113 34.1%
(as % of sales) 48.3% 52.2%
Staff Cost 226 285 26.2%
(as % of sales) 4.7% 4.8%
Other Expenditure 1,159 1,359 17.2%
(as % of sales) 24.1% 22.8%
Total 3,706 4,757 28.3%

Higher other income- fillip to net margin: The net profit growth was higher at 66% even though margins were under pressure. Other income has almost increased four and a half times as a results of company booking profits on investments. Also, the tax incidence during the quarter was lower due to lower tax on capital gains as well as optimization of tax incentive for the companyís Goa plant.

What to expect?
At Rs 266, the stock is trading at a price to earnings multiple of 20.6 times annualised 9mFY05 earnings and 16x our FY07 earnings estimate. The company is significantly increasing its international operations and on the exports front, Cipla will be a strong performer due to its long standing in the industry and technological skills. Also, being one of the most efficient producers of bulk drugs, Cipla is likely to maintain margins in the international markets, where it has adopted a low risk strategy of supplying bulk drugs to generic companies like Ivax and Watson. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands. We expect Cipla to be a strong performer in the market and maintain a hold view on the stock from a two to three year perspective.

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