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Cipla: API exports recover - Views on News from Equitymaster

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Cipla: API exports recover

Jan 25, 2008

Performance summary
  • Revenues grow by a robust 22% YoY due to strong performances by the domestic formulations (up 19% YoY) and API export (up 31% YoY) businesses.
  • EBDITA margins improve by 1.2% led by a substantial fall in raw material costs (as percentage of sales).

  • Lower other income and higher interest costs result in the bottomline growing at a relatively slower pace than the topline. Excluding the extraordinary expense during the quarter, bottomline growth stands at 23% YoY.

Financial performance: A snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 8,805 11,045 25.4% 26,337 31,047 17.9%
Expenditure 6,679 8,252 23.6% 19,646 24,408 24.2%
Operating profit (EBIDTA) 2,126 2,793 31.3% 6,691 6,640 -0.8%
Operating profit margin (%) 24.1% 25.3%   25.4% 21.4%  
Other income 328 242 -26.2% 737 846 14.7%
Interest 13 38 190.9% 57 70 24.0%
Depreciation 275 330 19.9% 780 960 23.0%
Profit before tax 2,166 2,667 23.1% 6,591 6,455 -2.1%
Tax 322 390 21.1% 1,241 1,075 -13.3%
  - (170)   - (170)  
Profit after tax/ (loss) 1,844 2,107 14.2% 5,351 5,210 -2.6%
Net profit margin (%) 20.9% 19.1%   20.3% 16.8%  
No. of shares (m) 777.2 777.2   777.2 777.2  
Diluted earnings per share (Rs)*         6.4  
P/E ratio (x)*         28.6  
(* on a trailing 12-months basis)

What has driven performance in 3QFY08?
  • Cipla clocked a robust 25% YoY topline growth during 3QFY08, led by strong performances of both its domestic formulations and API export businesses. Domestic sales grew by 19% YoY and was driven by the anti-asthmatics, cardiovascular, anti-biotics and anti-retrovirals segments. Export growth of 22% YoY during the quarter was attributed to the healthy 31% YoY growth reported by the API segment. This is an encouraging sign given the fact that API exports performed poorly in the last three quarters. The strong growth in exports is also commendable against the backdrop of a sharply appreciating rupee.

    Business snapshot
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Domestic 4,353 5,195 19.3% 13,526 15,342 13.4%
    - Formulations 3,113 3,711 19.2% 9,100 10,973 20.6%
    - APIs 1,066 1,398 31.2% 3,415 3,632 6.4%
    Total exports 4,179 5,109 22.3% 12,514 14,605 16.7%
    Total sales 8,532 10,304 20.8% 26,040 29,947 15.0%
    Other operating income            
    - Technology knowhow/fees 257 748 191.6% 523 1,275 144.0%
    - Others 257 232 -9.7% 505 525 4.1%
    Total 513 980 90.9% 1,027 1,800 75.3%
    Total income from operations 9,045 11,284 24.8% 27,067 31,747 17.3%

  • Operating margins expanded by 120 basis points (1.2%) largely due to fall in raw material costs (as percentage of sales) leading to the robust 31% YoY growth in operating profits. Staff costs increased due to overall increase in manpower, salary revisions and change in Bonus Act. Other expenditure, during the quarter, rose on account of increased expenditure on advertisement, repairs and maintenance, professional fees and travel expenditure.

  • The bottomline growth at 14% YoY has been slower than the topline growth on account of lower other income and higher interest costs. Tax expenses for the quarter were slightly lower because of tax incentives available for EOUs and at Baddi. Cipla incurred a one-time expense of Rs 170 m during the quarter and excluding the impact of the same, the bottomline registered a decent 23% YoY growth.

What to expect?
At the current price of Rs 183, the stock is trading at a price to earnings multiple of 13.2 times our estimated FY10 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. That said, while in the medium term, the poor performance of the API exports is a cause for concern, in the longer term, the company’s minimal focus on R&D is likely to weigh heavy on its overall growth. Given the fact that the performance of the company for 9mFY08 has been lower than our estimates for the full year, especially on the revenue front, we shall have to revise our revenue estimates while keeping the operating margin numbers intact. Overall, we maintain our positive view on the stock.

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