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Cipla: Exports play spoilsport - Views on News from Equitymaster
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Cipla: Exports play spoilsport
Jan 29, 2010

Performance summary
  • Revenues grow by 7% YoY in 3QFY10 led by the domestic formulation and API export businesses.
  • EBDITA margins expand by 4.3% due to lower raw material costs and other expenditure (as percentage of sales).
  • Bottomline grows 29% YoY growth largely bolstered by strong performance at the operating level and lower interest costs.


Financial performance: A snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 13,403 14,385 7.3% 38,969 42,553 9.2%
Expenditure 10,444 10,586 1.4% 31,946 31,531 -1.3%
Operating profit (EBIDTA) 2,959 3,799 28.4% 7,023 11,022 56.9%
Operating profit margin (%) 22.1% 26.4%   18.0% 25.9%  
Other income 185 178 -3.5% 524 426 -18.6%
Interest 110 44 -60.3% 203 232 14.5%
Depreciation 412 457 11.0% 1,200 1,393 16.1%
Profit before tax 2,622 3,477 32.6% 6,144 9,824 59.9%
Tax 388 587 51.4% 995 1,759 76.8%
Profit after tax/ (loss) 2,234 2,890 29.4% 5,149 8,065 56.6%
Net profit margin (%) 16.7% 20.1%   13.2% 19.0%  
No. of shares (m)       777.3 802.9  
Diluted earnings per share (Rs)*         13.0  
P/E ratio (x)         24.6  
* excluding forex losses

What has driven performance in 3QFY10?
  • Cipla clocked a subdued 7% YoY topline growth during 3QFY10. The domestic business did well to grow by 14%. However, overall exports declined by 1% YoY, largely due to the 3% YoY fall in formulation exports. Had it not been for the 10% YoY growth in API exports, the decline in overall exports would have been steeper. The fall in formulation exports was primarily due to lower sales of anti-retroviral (ARV) products particularly in the case of the tender business. The reduction in volumes in the latter was mainly because the company’s chose be more cost effective in such a type of business.

    Business snapshot
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Domestic 5,781 6,592 14.0% 17,548 19,425 10.7%
    Exports            
    - Formulations 5,907 5,758 -2.5% 16,172 17,048 5.4%
    - APIs 1,116 1,229 10.1% 4,130 4,339 5.1%
    Total exports 7,024 6,987 -0.5% 20,302 21,387 5.3%
    Total sales 12,804 13,579 6.0% 37,850 40,812 7.8%
    Other operating income            
    - Technology knowhow/fees 613 703 14.6% 1,198 1,467 22.5%
    - Others 147 241 64.3% 396 679.8 71.8%
    Total 760 943 24.2% 1,594 2,147 34.7%
    Total income from operations 13,564 14,522 7.1% 39,444 42,960 8.9%

  • Operating margins expanded by 4.3% to 26.4% largely due to a fall in raw material costs and other expenditure (as percentage of sales). Raw material costs fell from 44.2% in 3QFY09 to 43.4% in 3QFY10 largely due to a change in product mix. Lower selling expenses also did its part in bolstering margins. Staff costs were, however, higher on account of increase in operations.

  • The bottomline grew by 29% YoY due to a strong show at the operating level and lower interest costs. Interest costs reduced during the quarter due to repayment of short-term working capital loans and fixed deposits availed by the company.

What to expect?
At the current price of Rs 319, the stock is trading at a price to earnings multiple of 16.7 times our estimated FY12 earnings. We believe that Cipla’s focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential especially in FY12 when the number of drugs going off patent is considerable. 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. Overall, valuations are on the higher side with not much upside.

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