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Cipla: Exports drive growth
Jan 24, 2006

Performance Summary
Cipla has announced robust results for the third quarter and nine-month period ended December 2005. The healthy topline growth has largely been driven by an impressive performance of its API exports. This, coupled with stable operating margins and a considerable rise in other income, has aided the strong bottomline growth.

Financial performance: A snapshot
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 5,961 7,806 30.9% 17,069 21,151 23.9%
Expenditure 4,757 6,217 30.7% 13,478 16,290 20.9%
Operating profit (EBIDTA) 1,205 1,589 31.9% 3,591 4,861 35.4%
Operating profit margin (%) 20.2% 20.4%   21.0% 23.0%  
Other income 412 745 80.8% 605 843 39.4%
Interest 12 51 308.9% 66 81 23.9%
Depreciation 128 230 80.4% 383 580 51.6%
Profit before tax 1,477 2,053 39.0% 3,748 5,043 34.6%
Tax 220 300 36.4% 740 950 28.4%
Profit after tax/ (loss) 1,257 1,753 39.5% 3,008 4,093 36.1%
Net profit margin (%) 21.1% 22.5%   17.6% 19.4%  
No. of shares (m) 299.9 299.9   299.9 299.9  
Diluted earnings per share (Rs)*         17.2  
P/E ratio (x)*         25.1  
(* trailing twelve months)            

What is the company’s business?
Cipla is the third 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 the 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 the domestic market, which includes antibiotics, anti-bacterial, anti-asthmatics, anti-inflammatory, antiretroviral, anti-cancer and cardiovascular. The company also concentrates on developing specialty bulk drugs for export markets.

What has driven performance in 3QFY06?
Robust revenue growth: Cipla posted a robust 31% YoY growth in topline, which was due to a strong performance by both its domestic and exports businesses. The healthy 35% YoY growth in exports was led by the API segment, which clocked a buoyant 94% YoY growth during the quarter. The therapeutic areas, which contributed to the exports growth, were anti-retrovirals, anti-malarials, anti-asthmatics, anti-depressant and anti-epileptic segments. The domestic business also registered a respectable 18% YoY growth driven by anti-retrovirals, anti-inflammatory and anti-ulcerant segments.

Business snapshot
  3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Domestic 3,354 3,956 17.9% 10,518 11,531 9.6%
Exports            
- Formulations 2,079 2,361 13.6% 5,076 6,995 37.8%
- APIs 774 1,503 94.2% 2,226 2,922 31.3%
Total exports 2,853 3,864 35.4% 7,301 9,916 35.8%
Total sales 6,207 7,819 26.0% 17,819 21,447 20.4%
Other operating income            
- Technology knowhow/fees 143 260 81.3% 314 354 12.8%
- Others 64 40 -36.7% 175 295 68.2%
Total 207 300 45.1% 489 649 32.6%
Total income from operations 6,414 8,119 26.6% 18,308 22,096 20.7%

Stability in margins: Margins remained largely stable at 20.4% during the quarter. While raw materials costs as a percentage of sales declined, other expenditure as a percentage of sales witnessed a rise mainly due to an overall increase in the level of operations and commencement of the Baddi factory. This resulted in increased manufacturing overheads including power & fuel, stores & spares and repairs & maintenance.

Cost break-up
(% of sales) 3QFY05 3QFY06 9mFY05 9mFY06
Raw material cost 52.2% 49.6% 51.3% 47.0%
Staff cost 4.8% 4.5% 5.0% 5.0%
Other expenditure 22.8% 25.6% 22.7% 25.1%

Bottomline boost:The bottomline outpaced the topline growth, registering a 40% YoY growth despite a steep rise in interest costs and depreciation charges. The rise in interest costs can be attributed to increase in borrowings for working capital purposes. Depreciation costs also increased by 80% YoY on account of substantial manufacturing facility additions in Goa and Baddi. Therefore, what contributed to the bottomline growth was the other income component. This income included an amount of Rs 727 m, which the company received against insurance claims. These claims were in respect of the damage to finished goods at the company's Bhiwandi warehouse in Mumbai caused by the floods in July 2005.

Over the quarters: Despite the decline in revenues in 4QFY05 owing to VAT related concerns, Cipla’s performance at the topline level has been very encouraging due to a strong growth in the domestic market as well as exports. At the operating level also, the company has consistently managed to maintain margins above 20% levels.

Quarterly trend
  2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06
Net sales growth 28.8% 24.0% -6.1% 24.2% 15.5% 30.9%
Operating profit margin 22.7% 20.2% 25.6% 22.6% 26.4% 20.4%
Net profit growth 37.9% 66.8% 3.8% 40.5% 27.9% 39.5%

What to expect?
At the current price of Rs 432, the stock is trading at a price to earnings multiple of 19.5 times our estimated FY08 earnings, which is at the higher end of our valuation spectrum. Cipla has significantly increased its international operations and we believe that, on the exports front, the company will be a strong performer as it has adopted a low risk strategy of supplying bulk drugs to generic companies like Ivax and Watson. We believe that this focus on contract manufacturing will enable the company to maintain healthy margins going forward. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands.

We had recommended a ‘Buy’ on the stock in May 2005 with a target price of Rs 442 from a long-term perspective, which has been breached. While we remain positive about the growth prospects of the company, at the current juncture the stock seems fairly valued.

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