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Cipla: Margin pressure continues - Views on News from Equitymaster
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Cipla: Margin pressure continues
Apr 25, 2008

Performance summary
  • Revenues grow by a decent 18% YoY in FY08 due to strong performances by both the domestic and export formulations businesses.

  • EBDITA margins reduce by 2.5% led by a rise in all costs (as percentage of sales).

  • Higher interest costs and depreciation charges result in the bottomline growing at a relatively slower pace than the topline. Excluding the extraordinary expense during the year, bottomline growth stands at a subdued 7% YoY.

    Financial performance: A snapshot
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Net sales 9,385 11,221 19.6% 35,707 42,268 18.4%
    Expenditure 7,915 9,194 16.2% 27,505 33,602 22.2%
    Operating profit (EBIDTA) 1,470 2,027 37.9% 8,202 8,667 5.7%
    Operating profit margin (%) 15.7% 18.1%   23.0% 20.5%  
    Other income 221 407 84.4% 981 1,252 27.7%
    Interest 13 46 253.5% 70 116 66.8%
    Depreciation 261 367 40.6% 1,034 1,326 28.3%
    Profit before tax 1,417 2,021 42.7% 8,080 8,477 4.9%
    Tax 160 227 42.2% 1,400 1,302 -7.0%
    Extraordinary item - -   - (170)  
    Profit after tax/ (loss) 1,257 1,795 42.7% 6,680 7,005 4.9%
    Net profit margin (%) 13.4% 16.0%   18.7% 16.6%  
    No. of shares (m)       777.2 777.2  
    Diluted earnings per share (Rs)         9.0  
    P/E ratio (x)         24.9  

    What has driven performance in FY08?
    • Cipla clocked a decent 18% YoY topline growth during FY08, led by strong performances of both its domestic and export formulations businesses. Domestic sales grew by 13% YoY and was driven by the anti-asthmatics, cardiovascular, anti-biotics and anti-retrovirals segments. Export growth of 19% YoY during the year was attributed to the healthy 21% YoY growth reported by the formulations segment. While the performance of the API exports segment left a lot to be desired during the first half of the year, revenues picked up during the last two quarters enabling the business to post a respectable 12% YoY growth for the full year. The decent growth in exports is also commendable against the backdrop of a sharply appreciating rupee.

      Business snapshot
      (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
      Domestic 3,997 4,525 13.2% 17,527 19,867 13.4%
      Exports            
      - Formulations 3,879 4,730 21.9% 12,968 15,703 21.1%
      - APIs 1,415 1,769 25.0% 4,836 5,400 11.7%
      Total exports 5,293 6,498 22.8% 17,804 21,103 18.5%
      Total sales 9,291 11,023 18.6% 35,332 40,970 16.0%
      Other operating income            
      - Technology knowhow/fees 242 259 7.2% 765 1,534 100.6%
      - Others 71 146 103.9% 560 671 19.8%
      Total 313 405 29.2% 1,325 2,205 66.4%
      Total income from operations 9,604 11,428 19.0% 36,656 43,175 17.8%

    • Operating margins, however, declined by 250 basis points (2.5%) largely due to rise in all costs (as percentage of sales) leading to the muted 6% YoY growth in operating profits. Staff costs increased due to overall increase in manpower, annual increments and impact of change in accounting guidelines for employee benefits (AS-15). Other expenditure, during the year, rose on account of increased expenditure on advertisement, travel expenditure and processing charges.

    • While the bottomline growth at 5% YoY has been considerably slower than the topline growth, it has been more or less in tandem with the growth in operating profits. This has been on account of higher interest costs and depreciation charges. Having said that, if one were to exclude the one-time expense of Rs 170 m then the bottomline growth at 7% YoY has been a tad better than the growth in operating profits. Tax expenses for the year were slightly lower because of tax incentives available for EOUs and at Baddi. Also, higher other income during the year has been attributed to foreign exchange gains of Rs 250 m.

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