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Cipla: Operating income saves the day - Views on News from Equitymaster
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Cipla: Operating income saves the day
Mar 9, 2015

Cipla has announced its 3QFY15 results. The company has reported 2.4% YoY growth in sales and 14.6% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow modestly by 2.4% YoY during the quarter led by growth in its domestic formulations.
  • Operating margins, including other operating income, surged by 2% during the quarter on account of the sharp rise in the other operating income.
  • On back of better operating performance, the net profits increased by 14.6% YoY.

Financial performance: A snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 22,717 23,252 2.4% 68,999 70,760 2.6%
Other operating income 284 1,411 397.0% 2,521 3,544 40.5%
Expenditure 18,972 19,845 4.6% 55,208 58,622 6.2%
Operating profit (EBDITA) 4,029 4,817 19.6% 16,312 15,681 -3.9%
EBDITA margin (%) 17.5% 19.5% 2.0% 22.8% 21.1%  
Other income 531 466 -12.1% 1,867 1,072 -42.6%
Interest (net) 283 434 53.2% 1,027 1,004 -2.3%
Depreciation 821 977 19.0% 2,426 3,217 32.6%
Exceptional item       - -  
Profit before tax 3,456 3,873 12.1% 14,727 12,532 -14.9%
Tax 849 883 4.1% 3,610 2,860 -20.8%
Profit after tax/(loss) 2,608 2,990 14.6% 11,117 9,672 -13.0%
Net profit margin (%) 11.3% 12.1%   15.5% 13.0%  
No. of shares (m)         840.3  
Diluted earnings per share(Rs)         15.6  
Price to earnings ratio (x)*         43.6  
* based on trailing 12 months earnings

What has driven performance in 3QFY15?
  • Cipla's topline (including operating income) grew by 7.2% YoY. There was a onetime operating income from Salix, which helped the overall topline growth.

    Consolidated Business
    (Rs mn) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
    Domestic 10,500 11,990 14.2% 31,911 37,391 17.2%
    Exports
    Formulations 13,600 12,750 -6.3% 36,801 37,361 1.5%
    API 1,580 1,510 -4.4% 5,120 4,270 -16.6%
    Total exports 15,180 14,260 -6.1% 41,921 41,631 -0.7%
    Total gross sales 25,680 26,250 2.2% 73,832 79,022 7.0%

  • Cipla's domestic business grew by 14.2% YoY for 3QFY15. The company's growth was above the industry growth of 10-11% for the quarter.

  • International business declined during the quarter by 6.1% YoY. As per the management, the main reasons for this decline were capacity constraints. Further, the company's business model is undergoing a transition to a front end model and this has impacted revenues temporarily. Other than this, product rationalization and lower business from tenders have also hindered the export growth. On the positive side, the company has received contract from Teva for supply of API and formulations of Nexium (market size of US$ 3 bn in US). This being a low competition product can be an important growth driver for the upcoming quarters. The company has already started some supply of this drug to its partner.

  • Excluding other operating income, the margins have declined by 1.8% to 14.7% for the quarter.

  • Adjusting for the other operating income, the net profits were down by 32.1% YoY. This was partly attributable to higher interest costs.
What to expect?

At the current price of Rs 678, the stock is trading at a price to earnings multiple of 25.4 times our estimated FY17 earnings. Currently, the company is in a transition phase, and is working towards shifting its business model to front end. This has impacted the company's margins and revenues to some extent. On the business front, Cipla is expected to witness good growth in the domestic market, owing to leadership in its therapies. However, increasing competition cannot be ruled out. Cipla is eyeing inhaler opportunities in the international markets and has also launched some drugs in some European and emerging markets. However, in the long term, increasing the market share of these drugs will be an important milestone. Overall, we reiterate our Hold rating on the stock. 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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