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Cipla: Export formulations fuels growth
Feb 6, 2013

Cipla has announced its 3QFY13 results. The company has reported 18% YoY growth in sales and a 26% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 18% YoY during the quarter led by growth in its international business and technology income.
  • Operating margins improve by 1.5% leading to a 26% YoY growth in operating profits.
  • Bottomline increases by 26% YoY during 3QFY13 despite higher tax growth of 65% YoY. PAT margins improve by 1%

Financial performance: A snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 17,580 20,705 17.8% 51,190 62,205 21.5%
Expenditure 13,665 15,776 15.4% 39,288 45,108 14.8%
Operating profit (EBDITA) 3,915 4,929 25.9% 11,902 17,097 43.6%
EBDITA margin (%) 22.3% 23.8%   23.3% 27.5%  
Other income 302 535 77.3% 876 1,707 94.8%
Interest (net) 32 93 187.0% 99 158 59.6%
Depreciation 757 780 3.0% 2,116 2,248 6.2%
Profit before tax 3,426 4,591 34.0% 10,563 16,398 55.2%
Tax 727 1,203 65.4% 2,242 4,003 78.5%
Profit after tax/(loss) 2,699 3,388 25.5% 8,321 12,396 49.0%
Net profit margin (%) 15.4% 16.4%   16.3% 19.9%  
No. of shares (m)         840.3  
Diluted earnings per share (Rs)         18.6  
Price to earnings ratio (x)*         21.7  
*based on trailing 12 months earnings

What has driven performance in 3QFY13?
  • Cipla's topline grew by 18% YoY during the quarter led by growth in formulations and technology income.
    Business snapshot
    (Rs mn) 3QFY13 3QFY13 Change 9MFY12 9MFY13 Change
    Domestic 8,687 9,569 10.2% 24,594 28,882 17.4%
    Exports
    Formulations 7,022 9,692 38.0% 21,125 28,183 33.4%
    API 1,637 1,348 -17.6% 4,944 4,770 -3.5%
    Total exports 8,658 11,040 27.5% 26,070 32,953 26.4%
    Total sales 17,345 20,609 18.8% 50,663 61,835 22.1%
    Other operating income
    Technology know how fees 78 168 114.6% 254 271 6.8%
    Others 387 229 -40.8% 613 993 62.1%
    Total 465 397 -14.7% 867 1,265 45.9%
    Total income from operations 17,810 21,006 17.9% 51,530 63,100 22.5%

  • Cipla's domestic business witnessed growth of 10% YoY for 3QFY13. Therapeutic areas of anti-asthma, antibiotics and cardiovascular contributed to the overall domestic growth. The quarter was challenging for the whole Indian pharma market. The domestic market grew by 10% for the October-December 2012 quarter. For the upcoming period, Cipla has guided for 15%+growth for the domestic segment. The current MR strength for the domestic segment stands at 7,500.

  • International business grew by 28% YoY during 3QFY13. The export formulations segment witnessed robust growth of 38% YoY for the quarter. Post expiry of 180-days exclusivity, 'Escitalopram' (Lexapro) contribution was insignificant during the quarter. The company has generated approx US$ 80 m from 'Escitalopram' exclusivity. Cipla's partner Cipla Medpro has also won an ARV tender worth US$160 m for a two-year period commencing January 1, 2013. This is a considerable improvement on the company's previous ARV tender which were approx US$ 70 m from 2010 to 2012. Further, the company has also received USFDA approval for its Indore facility. These events will help Cipla grow its exports. However, as ARV tenders do not offer handsome margins, upside from these contracts will narrow down to the bottom line. The export API segment witnessed an 18% decline in growth for the quarter. This was due to one off sales in 3QFY12 relating to supply of some APIs.

  • Operating margins improved by 1.5% leading to a 26% YoY growth in operating profits. The company incurred forex gain of Rs 190 m during the quarter vs. Rs 45 m for 3QFY12. Adjusting for forex, the EBITDA margins improved by 1%.

  • Bottomline increased by 26% YoY during 3QFY13 despite higher tax growth of 65% YoY. PAT margin improved by 1%. For the upcoming period, the company has guided for tax rate to hover in range of 20-24%.

  • Cipla has incurred capex of Rs 6.7 bn for 9mFY13. Large part of the capex for FY13 has been incurred towards formulations facility and a new office in Mumbai. For FY14, the company has guided for capex of Rs 3-4 bn towards API and R&D facility. Cipla's net cash position stands at Rs 14 bn.

      Other updates:

      Dymista: During the quarter, Cipla's partner Meda received approval for Dymista in the EU market. The company expects to begin its supply in the next few months. Meda is selling the drug in the US and as of now the contribution from this product is very little.

      Front end presence: Cipla has always kept its international exports limited to supply through partners. However, now the company intends to establish its operations in the front end. In the US too, company intends to launch drugs (without partners). The company has recently filed 4-5 ANDAs in the US and also has portfolio of around 30 approved drugs which are not yet launched in the US. Cipla is also looking to make small acquisitions in emerging markets.

      Cipla's Medpro acquisition: Some time back Cipla had offered to buy 51% stake in Cipla Medpro at a premium price of 8% from the market price on the date of the offer. However with the change in the top management in Cipla Medpro, currency depreciation and incoming of new ARV tenders, company is revisiting the offer price. Acquiring stake in Cipla Medpro acquisition is a step forward towards its front end strategy.

      Indore facility: The company has received USFDA approval for its Indore facility. For 9mFY13, the company has generated revenues of Rs 4 bn. For the full year, the company expects revenues of Rs 6 bn for FY13. With this approval revenues from this facility are expected to ramp up going forward.

      Probable launches in US through partners: Cipla might be generic supplier of two drugs Truvada and Viread to Teva in the upcoming period. The company declined to comment on its launch status or launch date. The branded sales of these two drugs are US$ 1,613 m and US$ 388 m respectively in the US. We believe this opportunity will not be before FY18.

What to expect?
At the current price of Rs 395, the stock is trading at a price to earnings multiple of 18 times our estimated FY15 earnings. On the domestic front, company's topline will get impacted due to the pricing policy which is still awaiting clearance from the Court. The company is also looking to gain an advantage with the ramp up of exports through the Indore SEZ facility.

Cipla is eyeing inhaler opportunities in the international markets and also aiming for front end operations. Though the company will have better growth on the export front especially from ARV and US segment, the impact of pricing policy on domestic formulations, higher tax rate and ramp up in inhaler segment in developed markets are the major concerns.

In light of current developments with regard to the Indore facility US approval, new ARV tender and increase in tax, we have revised our estimates. Thus, at current price levels, we recommend investors to HOLD on to the stock.

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