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Cipla: Profits take a beating
Feb 4, 2011

Cipla has announced its 3QFY11 results. The company has reported 8% YoY growth in sales and 19.5% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by 8% YoY in 3QFY11 led by both the domestic and export businesses.
  • EBDITA margins contract by 5.9% due to a rise in all costs (as percentage of sales).
  • Decline in operating profits and higher depreciation charges lead to the 19.5% YoY fall in net profits.


Financial performance: A snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 14,385 15,537 8.0% 42,553  46,488 9.2%
Expenditure 10,586 12,355 16.7% 31,531  36,134 14.6%
Operating profit (EBIDTA)   3,799   3,182 -16.2% 11,022  10,353 -6.1%
Operating profit margin (%) 26.4% 20.5%   25.9% 22.3%  
Other income 178 257 44.0% 426  591 38.6%
Interest    44   29 -33.0% 232    33 -85.7%
Depreciation 457 653 42.9%   1,393    1,840 32.1%
Profit before tax   3,477   2,757 -20.7%   9,824    9,071 -7.7%
Tax 587 430 -26.7%   1,759    1,540 -12.5%
Profit after tax/ (loss)   2,890   2,327 -19.5%   8,065    7,531 -6.6%
Net profit margin (%) 20.1% 15.0%   19.0% 16.2%  
No. of shares (m)         802.9    802.9  
Diluted earnings per share (Rs)*         11.6  
P/E ratio (x)**         27.8  
* excluding extraordinary item   ** on a trailing 12 months basis

What has driven performance in 3QFY11?
    Cipla clocked a subdued 8% YoY topline growth during 3QFY11. Growth in the domestic business stood at 11% YoY. However, exports performance was slightly better with sales growing by 12% YoY. While the exports formulations business grew by 12% YoY, the exports API business witnessed a 13% YoY growth in sales.

    Business snapshot
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Domestic 6,592 7,340 11.3% 19,425  21,655 11.5%
    Exports            
     - Formulations 5,758 6,432 11.7% 17,048  19,328 13.4%
     - APIs 1,229 1,386 12.8% 4,339  4,470 3.0%
    Total exports 6,987 7,818 11.9% 21,387 23,798 11.3%
    Total sales 13,579 15,158 11.6% 40,812 45,454 11.4%
    Other operating income          
     - Technology knowhow/fees 703 151 -78.5% 1,467  430 -70.7%
     - Others 241 372 54.4% 680  971.7 42.9%
    Total 943 523 -44.6% 2,147 1,402 -34.7%
    Total income from operations 14,522 15,681 8.0% 42,960 46,855 9.1%

  • Operating margins contracted by 5.9% to 20.5% largely due to a significant rise in staff costs and other expenditure (as percentage of sales). Staff costs (as percentage of sales) were higher by 2.5% on account of annual increments, increase in manpower (particularly at the Indore SEZ) and regrouping of contractual staff at its Goa facilities. Other expenditure increased from 24% in 3QFY10 to 26% in 3QFY11 largely due to due to increase in selling expenses and factory expenditure especially at the Indore SEZ.

  • The bottomline declined by 19.5% YoY during the quarter largely on account of the 16% YoY fall in operating profits and higher depreciation charges. This was despite higher other income and reduction in interest costs and tax expenses. Depreciation charges increased on account of additions to fixed assets mainly on account of commissioning of the Indore SEZ factory. Interest costs reduced during the quarter due to repayment of short-term working capital loans availed by the company.

What to expect?
At the current price of Rs 329, the stock is trading at a price to earnings multiple of 15.8 times our estimated FY13 earnings (ResearchPro subscribers can view latest updates here). 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. The company has performed lower than our estimates and hence we will have to downgrade our numbers for the full year accordingly. We shall soon update our research report on the company.

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