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Cipla: An all-round performance! - Views on News from Equitymaster

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Cipla: An all-round performance!

Apr 25, 2006

Performance summary
Cipla has announced robust results for the fourth quarter and year ended March 2006. Topline has recorded superlative growth during both the periods. Growth has been led by strong performance in both its domestic and exports businesses. While margins have remained stable during the fiscal, a rise in other income coupled with a reduction in tax outgo has contributed to a healthy bottomline growth.

Financial performance: A snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 5,350 8,706 62.7% 22,545 29,857 32.4%
Expenditure 3,981 6,903 73.4% 17,592 23,193 31.8%
Operating profit (EBIDTA) 1,369 1,803 31.7% 4,953 6,664 34.5%
Operating profit margin (%) 25.6% 20.7% 22.0% 22.3%
Other income 155 468 202.7% 820 1,311 59.9%
Interest 10 33 225.7% 76 114 49.7%
Depreciation 148 250 69.5% 551 830 50.8%
Profit before tax 1,366 1,988 45.5% 5,146 7,031 36.6%
Tax 310 80 -74.2% 1,050 1,030 -1.9%
Profit after tax/ (loss) 1,056 1,908 80.7% 4,096 6,001 46.5%
Net profit margin (%) 19.7% 21.9%   18.2% 20.1%  
No. of shares (m) 299.9 299.9    299.9 299.9  
Diluted earnings per share (Rs)*             8.0  
P/E ratio (x)*             32.5  
(* trailing twelve months)                  

What is the company’s business?
Cipla is the third largest pharma company in the domestic retail market (ORG survey) and has presence in formulations and bulk drugs manufacturing. All the bulk drug manufacturing facilities of the company have been approved by the US FDA and the formulation facilities have been approved by the Medicine Control Agency (UK), the Medicine Control Council (South Africa), the Therapeutic Goods Administration (Australia) and other international agencies. On the exports front, the company has strategic alliance with major generic manufactures such as Watson, Mylan, Barr and Ivax for supply of bulk drugs. It has a very wide product range in the domestic market, which includes antibiotics, anti-bacterial, anti-asthmatics, anti-inflammatory, antiretroviral, anti-cancer and cardiovascular. The company also concentrates on developing specialty bulk drugs for export markets.

What has driven performance in FY06?
Balanced revenue growth: Cipla clocked an impressive 32% YoY topline growth during the year driven by an all round performance of both its domestic and exports business. On the domestic front, the company grew 18% YoY (56% YoY growth in 4QFY06) due to the low base effect last year when VAT related issues negatively impacted sales. In addition, all the major segments including anti-asthmatics, cardiovascular and anti-biotics/bacterials segments performed well in the domestic market during the year.

Exports grew by 44% YoY largely driven by a healthy performance of the API business (up 69% YoY). It must be noted that the performance of this business was all the more better in 4QFY06, wherein revenues had grown by 190% YoY. The strong performance could be attributed in the scale-up of bulk orders in the global generics market. Formulations exports growth at 35% YoY, though impressive, was relatively slower in comparison to APIs. On the whole, in the exports market, anti-retrovirals, anti-malarials, anti-asthmatics, anti-depressants and cardiovascular segments contributed to the growth for Cipla.

Business snapshot
  4QFY05 4QFY06 Change FY05 FY06 Change
Domestic 2,235 3,495 56.4% 12,744 15,027 17.9%
Exports            
- Formulations 2,546 3,320 30.4% 7,651 10,315 34.8%
- APIs 670 1,946 190.3% 2,881 4,868 68.9%
Total exports 3,217 5,266 63.7% 10,532 15,182 44.2%
Total sales 5,452 8,762 60.7% 23,276 30,209 29.8%
Other operating income            
- Technology knowhow/fees 101 75 -25.3% 415 429 3.5%
- Others 142 119 -16.2% 318 414 30.3%
Total 243 195 -19.9% 733 843 15.1%
Total income from operations 5,695 8,956 57.3% 24,009 31,052 29.3%

Staid margin growth: Margins expanded by a mere 30 basis points during the year, largely due to lower raw material costs (se table below). In absolute terms, however, the company has witnessed a considerable increase in raw material costs, staff costs and other expenses. Rise in staff costs was due to overall increase in managerial remuneration and increase in manpower. Other expenditure was higher on account of overall increase in the level of operations and also due to the full impact of costs of operations of the new factory at Baddi in Himachal Pradesh.

Cost break-up
(% of sales) 4QFY05 4QFY06 FY05 FY06
Raw material cost 41.5% 49.5% 48.6% 47.7%
Staff cost 6.0% 4.9% 5.2% 4.9%
Other expenditure 26.9% 24.9% 24.3% 25.0%

The bottomline picture: The bottomline outpaced the topline growth during FY06, registering a 47% YoY growth. This was despite a steep rise in interest costs and depreciation charges and was largely due to a higher other income component and tax benefits on the Baddi plant. The rise in interest costs was due to increase in borrowings for working capital purposes. Depreciation costs also increased by 51% YoY on account of substantial additions to assets.

Over the quarters: Barring the decline in sales in 4QFY05 (VAT issues), Cipla has been performing well on the topline level on the back of a significant ramp up in its exports. However, margins have been under pressure and have declined over the last few quarters. Going forward, we expect margins to be more or less remain stable at the current levels.

Quarterly trend
  4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Net sales growth -6.1% 24.2% 15.5% 30.9% 62.7%
Operating profit margin 25.6% 22.6% 26.4% 20.4% 20.7%
Net profit growth 3.8% 40.5% 27.9% 39.5% 80.7%

What to expect?
At the current price of Rs 260, the stock is trading at a price to earnings multiple of 25.7 times our estimated FY08 earnings. Cipla has significantly increased its international operations and we believe that, on the exports front, the company will be a strong performer as it has adopted a low risk strategy of supplying bulk drugs to generic companies like Ivax and Watson. We believe that this focus on contract manufacturing shall gather momentum going forward keeping in mind the generics potential in the coming years. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands. The company’s performance in FY06 has been well above our estimates and we shall have to upgrade our numbers accordingly.

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