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Cipla: Higher taxes slow profit growth - Views on News from Equitymaster

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Cipla: Higher taxes slow profit growth
Feb 23, 2012

Cipla announced the third quarter results of financial year 2011-2012 (3QFY12). The company reported a 13% YoY and 16% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 13% YoY in 3QFY12 largely led by healthy growth in the domestic business.
  • EBDITA margins improve by 1.9% due to a substantial fall in raw material costs (as percentage of sales).
  • Bottomline growth is lower at 16% YoY as compared to growth in operating profits on account of a surge in tax expenses.


Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 15,571 17,580 12.9% 46,575 51,274 10.1%
Expenditure 12,389 13,666 10.3% 36,221 39,288 8.5%
Operating profit (EBIDTA) 3,182 3,915 23.0% 10,353 11,986 15.8%
Operating profit margin (%) 20.4% 22.3%   22.2% 23.4%  
Other income 257 302 17.4% 591 793 34.3%
Interest  29 32 10.6% 33 99 197.3%
Depreciation 653 757 16.1% 1,840 2,116 15.0%
Profit before tax 2,757 3,426 24.3% 9,071 10,564 16.5%
Tax 430 727 69.1% 1,540 2,242 45.6%
Profit after tax/ (loss) 2,327 2,699 16.0% 7,531 8,322 10.5%
Net profit margin (%) 14.9% 15.4%   16.2% 16.2%  
No. of shares (m)       802.9 802.9  
Diluted earnings per share (Rs)*         13.0  
P/E ratio (x)**         24.3  
** on a trailing 12 months basis

What has driven performance in 3QFY12?
  • Cipla clocked a decent 13% YoY topline growth during 3QFY12. Growth was largely led by the domestic business, which grew by 18% YoY. However, exports growth was lower at 11% YoY. This was on account of the poor performance of the exports formulations business, which grew by a lukewarm 9% YoY. The exports API business did better to report an 18% YoY growth in revenues.

    Business snapshot
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Domestic 7,340 8,687 18.4% 21,655 24,593 13.6%
    Exports            
    - Formulations 6,432 7,022 9.2% 19,328 21,126 9.3%
    - APIs 1,386 1,637 18.1% 4,470 4,945 10.6%
    Total exports 7,818 8,658 10.7% 23,798 26,071 9.5%
    Total sales 15,158 17,345 14.4% 45,454 50,664 11.5%
    Other operating income            
    - Technology knowhow/fees 151 78 -48.3% 430 254 -40.8%
    - Others 406 387 -4.6% 1,059 1,083.8 2.4%
    Total 557 465 -16.5% 1,488 1,338 -10.1%
    Total income from operations 15,715 17,810 13.3% 46,942 52,002 10.8%

  • Operating margins improved by 1.9% to 22.3% largely due to a significant fall in raw material costs (as percentage of sales). Staff costs (as percentage of sales) were higher by 2% on account of annual increments and increase in manpower. Other expenditure increased 0.2% in 3QFY12 largely due to due to increase in selling expenses, professional fees and factory expenditure.

  • Bottomline growth (up 16% YoY) was lower than the growth in operating profits on account of a surge in tax expenses. Tax for the current quarter increased mainly due to expiry of tax benefits on export oriented units (EOUs).

What to expect?
At the current price of Rs 316, the stock is trading at a price to earnings multiple of 15.9 times our estimated FY14 earnings We believe that Cipla's focus on contract manufacturing will get further steam and the management has also suggested about new possible partnerships. The company is planning to introduce 25 to 30 products every year in the domestic market and thus leverage its domestic reach. Having said this, Cipla has started facing competition in some of its products. The company is also looking to gain an advantage with the ramp up of exports through the Indore SEZ facility. We maintain a HOLD on the stock at the current price.

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