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Cipla: Profits take a big hit - Views on News from Equitymaster

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Cipla: Profits take a big hit
Feb 14, 2014

Cipla announced third quarter results of financial year 2013-2014 (3QFY14). The company reported a 22% YoY growth in sales but a 16.5% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by 22% YoY in 3QFY14 led by growth in export formulations.
  • EBDITA margins fall by 6.6% to 18.1% due to a rise in all cost heads (as percentage of sales).
  • On account of the decline in operating profits and surge in interest costs, net profits fall by 16.5% YoY.

Financial performance: A snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 21,108 25,808 22.3% 63,007 75,809 20.3%
Expenditure 15,902 21,135 32.9% 45,286 58,571 29.3%
Operating profit (EBIDTA) 5,206 4,673 -10.2% 17,721 17,238 -2.7%
Operating profit margin (%) 24.7% 18.1%   28.1% 22.7%  
Other income 509 524 3.0% 1,656 1,879 13.4%
Interest  79 333 322.6% 151 1,116 637.8%
Depreciation 849 912 7.4% 2,454 2,677 9.1%
Profit before tax 4,787 3,952 -17.4% 16,771 15,323 -8.6%
Exceptional item - -   398 -  
Tax 1,270 987 -22.3% 4,416 3,881 -12.1%
Minority int & share of associates (114) (122)   (70) (166)  
Profit after tax/ (loss) 3,403 2,843 -16.5% 12,684 11,277 -11.1%
Net profit margin (%) 16.1% 11.0%   20.1% 14.9%  
No. of shares (m)       802.9 802.9  
Diluted earnings per share (Rs)         17.2  
P/E ratio (x)**         21.6  
** on a trailing 12 months basis

What has driven performance in 3QFY14?
  • Cipla clocked a decent 22% YoY topline growth during 3QFY14. Growth was largely led by exports, which were up 32% YoY. In this, while export formulations were up 34% YoY, export APIs grew by 14% YoY. The consolidation of the Medpro acquisition also contributed to higher export sales. Growth in the domestic market stood at 13% YoY and was largely driven by the therapeutic areas of respiratory, anti-infectives and cardiology. For the nine month period, Cipla's overall revenues grew by 20% YoY.

    Business snapshot
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Domestic 9,270 10,443 12.6% 28,090 31,858 13.4%
    Exports 11,435 15,084 31.9% 33,608 41,377 23.1%
    Total sales 20,705 25,526 23.3% 61,698 73,235 18.7%
    Other operating income
       - Technology knowhow/fees 168 27 -83.8% 272  292 7.2%
       - Others 234 254 8.5% 1,037 2,282 120.1%
    Total 402 282 -30.0% 1,309 2,574 96.7%
    Total income from operations 21,108 25,808 22.3% 63,007 75,809 20.3%

  • Operating margins shrank by 6.6% to 18.4% in 3QFY14 largely due to a rise in all cost heads (as percentage of sales). There were several reasons for this. One was that there was significant contribution from the high margin product Escitalopram in 3QFY13, which was not there in the current quarter. The product mix also played a role in impacting margins because there was higher contribution from low margin ARVs. The consolidation of Cipla-Medpro business put further pressure. Overall, the company is transforming towards a front end business model and hence is hiring people at higher levels. In addition to this, the company is also spending more on R&D to build a robust pipeline. All of this led to substantial increase in costs thereby leading to the 10% YoY fall in operating profits.

  • On account of the decline in operating profits and surge in interest costs, net profits fell by 16.5% YoY. For the nine month period, the decline in net profits stood at 11% YoY.
What to expect?
At the current price of Rs 373, the stock is trading at a price to earnings multiple of 14.7 times our estimated FY16 earnings. Cipla's SEZ facility is expected to help it generate better topline growth for its export formulations. The company is intending to transform its business, to a front end model in various geographies. This could put some pressure on the margins in the medium term. Furthermore, Cipla is eyeing inhaler opportunities in the international markets.

In our view, while Cipla might be successful in establishing itself as a front end player, we believe ramp up in the inhaler segment in the developed markets will be a major challenge for the company. Given the correction in the stock price, our view is that investors can Buy the stock at the current price levels.

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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