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Cipla: Domestic business underperforms - Views on News from Equitymaster
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Cipla: Domestic business underperforms
Feb 12, 2016

Cipla has announced its 2QFY16 results. The company has reported 27.8% YoY growth in sales and 44.3% YoY in the net profits. Here is our analysis of the results.

Performance summary

  • Net sales grow by a healthy 27.8% YoY driven by formulations business, as well as the supply contract of Nexium (Esomeprazole).
  • The operating profits for the quarter increased by 41.4%, leading to a margin expansion of 2.7%.
  • Net profits surged by 44.3% YoY in tandem with the growth in operating profits and despite higher taxes.

Financial Snapshot

(Rs m) 2QFY15 2QFY16 Change 1HFY15 1HFY16 Change
Net sales 26,298 33,617 27.8% 52,770 71,386 35.3%
Other operating income 1,375 907 -34.0% 2,103 1,666 -20.8%
Expenditure 22,088 26,630 20.6% 43,871 54,768 24.8%
Operating profit (EBDITA) 5,585 7,894 41.4% 11,002 18,284 66.2%
EBDITA margin (%) 20.2% 22.9%   20.1% 25.0%  
Other income 233 259 11.2% 637 749 17.5%
Interest (net) 468 503 7.4% 801 1,016 26.8%
Depreciation 1,220 1,340 9.8% 2,474 2,628 6.2%
Minority interest 134 186 38.5% 404 255 -37.0%
Profit before tax 3,995 6,125 53.3% 7,959 15,134 90.1%
Tax 1,007 1,812 80.0% 2,026 4,315 113.0%
Profit after tax/(loss) 2,988 4,312 44.3% 5,933 10,819 82.4%
Net profit margin (%) 10.8% 12.5%   10.8% 14.8%  
No. of shares (m)         840.3  
Diluted earnings per share (Rs)         20.7  
Price to earnings ratio (x)*         31.0  

*based on trailing 12 months earnings


What has driven performance in 2QFY16?
  • Cipla's export formulations business witnessed quite a healthy growth, while the domestic performance was muted.
  • Consolidated Business Snapshot

    (Rs mn) 2QFY15 2QFY16 Change 1HFY15 1HFY16 Change
    Domestic 12,508 12,617 0.9% 25,398 26,587 4.7%
    Exports
    Formulations 12,390 18,740 51.3% 24,572 40,480 64.7%
    API 1,400 2,260 61.4% 2,800 4,320 54.3%
    Total exports 13,790 21,000 52.3% 27,372 44,800 63.7%
    Total sales 26,298 33,617 27.8% 52,770 71,386 35.3%
  • Cipla's domestic business grew by a mere 0.9% YoY because of the decline in revenues of its generic segment. This segment contributes approximately 20% to the total domestic sales. The revenue growth from the branded business was in line with the industry growth in mid teens.
  • Export formulations grew by 51.3% YoY, some part of this growth is attributable to supply of generic Nexium (Esomeprazole) made by the company to its partner under low competition. However, the sales were lower than that of the corresponding previous quarter. We had highlighted this in our first quarter result analysis too, that the sales from Esomeprazole will decline as the company has seen major surge in the June quarter itself. Further as the competition is increasing in this market, the sales are expected to plunge further. Assuming that Nexium did not have major impact during the quarter, the base export sales have grown at an encouraging pace. The company has also initiated the the supply of generic Pulmicort in the US. The impact of this will be seen in the upcoming quarter.
  • The company did not give any update about the negative observation it has received on its manufacturing facility. Over and above, it did not comment on the acquisition of Invagen and Exelan. These acquisitions are expected to be completed by the end of 2015.
  • As Nexium revenues were modest for the quarter, operating margins expanded by around 2.7% to 22.9% (in 1QFY16, the margins stood at 27%). The management reinstated the guidance of expansion in the operating margins by 1-1.5% per annum. Further, the company expects 2HFY16 to grow at slower pace as compared to 1HFY16.
  • Net profits grew by 44.3% YoY in tandem with the growth in operating profits.

What to expect?

At the current price of Rs 555, the stock is trading at a price to earnings multiple of 20.1 times our estimated FY18 earnings. On the international front, the company is building portfolio on the front end and also working with its partners. This combination will help the company in driving the export growth. On the domestic front it is looking to increase its presence in other therapies like dermatology.

The company has healthy portfolio in the respiratory space, which will be an important growth driver. While Cipla does not have sizeable revenues coming from international markets in the respiratory space, in long term increasing the market share of these drugs will be an important milestone.

The company has been actively building a lucrative product pipeline across the geographies and has increased its R&D expenses too. Overall, investors those who have Cipla in their portfolio can continue to Hold on to it.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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