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Cipla: Strong show minus forex

Apr 27, 2009

Performance summary
  • Revenues grow by a robust 25% YoY in FY09 due to strong performances by both the domestic and export formulation businesses.
  • EBDITA margins expand by 3.9% led by a substantial fall in raw material costs (as percentage of sales).
  • Bottomline grows by 9.5% YoY and is lower than the 49% YoY growth in operating profits largely due to forex losses incurred during the year (forex gains in FY08). Excluding the impact of the same during both the periods, bottomline registers a superlative 58% YoY growth.

Financial performance: A snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 11,221 13,667 21.8% 42,185 52,705 24.9%
Expenditure 9,190 10,076 9.6% 33,571 39,873 18.8%
Operating profit (EBIDTA) 2,031 3,592 76.9% 8,614 12,832 49.0%
Operating profit margin (%) 18.1% 26.3%   20.4% 24.3%  
Other income 153 155 1.0% 527 678 28.8%
Interest 46 133 191.0% 117 335 186.9%
Depreciation 367 557 51.8% 1,307 1,757 34.4%
Profit before tax 1,771 3,057 72.6% 7,717 11,419 48.0%
Forex loss/(gain) (250) 100   (667) 2,318  
Tax 227 428 88.5% 1,369 1,423 3.9%
Profit after tax/ (loss) 1,795 2,529 40.9% 7,014 7,678 9.5%
Net profit margin (%) 16.0% 18.5%   16.6% 14.6%  
No. of shares (m)       777.3 777.3  
Diluted earnings per share (Rs)*         6.9  
P/E ratio (x)         27.3  
* excluding forex losses

What has driven performance in FY09?
  • Cipla clocked a robust 25% YoY topline growth during FY09, led by strong performances of both its domestic and export formulation businesses. Domestic sales grew by 15% YoY while the export formulations grew by a healthy 40% YoY. Depreciation of the rupee against the dollar played a part in augmenting the growth of exports. Revenues from the API business failed to impress as the same grew by a mere 6% YoY during FY09 due to lower sales of certain key bulk drugs in the last two quarters.

    Business snapshot
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Domestic 4,525 5,245 15.9% 19,868 22,793 14.7%
    - Formulations 4,730 5,553 17.4% 15,537 21,725 39.8%
    - APIs 1,769 1,689 -4.5% 5,481 5,819 6.2%
    Total exports 6,498 7,242 11.4% 21,017 27,544 31.1%
    Total sales 11,023 12,487 13.3% 40,886 50,337 23.1%
    Other operating income            
    - Technology knowhow/fees 259 999 285.7% 1,534 2,197 43.2%
    - Others 146 317 117.4% 672 781.8 16.4%
    Total 405 1,316 225.1% 2,206 2,979 35.0%
    Total income from operations 11,428 13,802 20.8% 43,091 53,315 23.7%

  • Operating margins expanded by 3.9% largely due to a fall in raw material costs (as percentage of sales) from 35.8% in FY08 to 33.8% in FY09. This was attributed to improved export realisations as also changes in the product mix. Further, impact of the exchange rate also played a part in enhancing margins as exports were booked at the prevailing exchange rates. The company managed to keep its other cost heads under control.

  • The bottomline grew by 9.5% YoY and was lower than the 49% YoY growth in operating profits largely due to forex losses of Rs 2.3 bn incurred during the year (forex gains of Rs 667 m in FY08). The forex losses during the year were on account of revaluation of forward contracts and foreign currency loans subsequent to the depreciation of the rupee against the dollar. Excluding the foreign exchange impact during both the quarters, the bottomline jumped 58% YoY due to a lower tax outgo. The effective tax rate for the year was lower at 12.5% (17.7% in FY08) due to tax incentives availed for EOUs, Baddi and the new plant at Sikkim, which commenced commercial production during 1QFY09. Interest costs, however, increased during the year due to short term working capital loans availed by the company.

What to expect?
At the current price of Rs 242, the stock is trading at a price to earnings multiple of 16.3 times our estimated FY11 earnings. We believe that Cipla’s focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands. Having said that, in the longer term, the company’s minimal focus on R&D is likely to weigh heavy on its overall growth. The performance in FY09 has been in line with our estimates. Overall, we maintain our positive view on the stock.

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