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Cipla: Profits hit by under-utilized SEZ

May 6, 2011

Cipla has announced its FY11 results. The company has reported 12.3% YoY growth and 10.6% YoY de-growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 12.3% YoY in FY11 led by the bulk export and formulation exports businesses.
  • Operating (EBDITA) margins decrease by 2.9% due to higher raw material costs due to the change in product mix and employee cost.
  • Bottomline decrease by 10.6% YoY in FY11 to Rs 9,671 m during the year due to the higher base effect and higher depreciation charges. The higher bottomline in FY10 was an outcome of onetime exceptional income on sale of 'i-pill' brand to Piramal Healthcare in India.

Financial performance: A snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 13,747 16,692 21.4% 56,249 63,180 12.3%
Expenditure 11,167 13,671 22.4% 42,718 49,805 16.6%
Operating profit (EBIDTA) 2,580 3,022 17.1% 13,532 13,375 -1.2%
Operating profit margin (%) 18.8% 18.1%   24.1% 21.2%  
Other income 451 204 -54.9% 883 794 -10.1%
Interest   5 18 262.0% 237 51 -78.3%
Depreciation 495 697 40.7% 1,878 2,536 35.0%
Profit before tax 2,531 2,510 -0.8% 12,300 11,581 -5.8%
Exceptional items 950 - -100.0% 950 - -100.0%
Tax 726 370 -49.0% 2,435 1,910 -21.6%
Profit after tax/ (loss) 2,755 2,140 -22.3% 10,815 9,671 -10.6%
Net profit margin (%) 20.0% 12.8%   19.2% 15.3%  
No. of shares (m)       802.9 799  
Diluted earnings per share (Rs)*       12.3 12.1  
P/E ratio (x)       26.3 25  
* excluding forex gains / losses

What has driven performance in FY11?
  • Cipla's sales grew by 12.3% YoY during FY11. The exports business showed vigor and grew by 15.7% led by the strong API growth. The domestic business did reasonably well to grow by 12%. The growth would have been higher but for the technology fees that decreased by 60%. Business snapshot

    Business snapshot
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Domestic 5,688 6,522 14.7% 25,113 28,178 12.2%
    - Formulations 6,139 7,428 21.0% 23,188 26,756 15.4%
    - APIs 1,463 2,322 58.7% 5,802 6,792 17.1%
    Total exports 7,602 9,750 28.2% 28,989 33,548 15.7%
    Total sales 13,290 16,272 22.4% 54,103 61,726 14.1%
    Other operating income
    - Technology knowhow/fees 136 207 52.3% 1,603 637 -60.3%
    - Others 437 333 -23.9% 1,116.30 1,304 16.9%
    Total 572 540 -5.6% 2,719 1,941 -28.6%
    Total income from operations 13,862 16,812 21.3% 56,822 63,667 12.0%

  • Operating (EBDITA) margins decreased by 2.9% (as a percentage of sales) due to higher raw material costs and employee cost. Raw material costs rose from 43.9% in FY10 to 46.1% in FY11 largely due to a change in product mix to higher proportion of anti-retrovirals in formulation exports. As observed in all the pharmaceutical companies, employee costs escalated by 2% points to 8.6% (as a percentage of sales) and hampered the operating margins further.

  • Bottomline decreased by 10.6% YoY in FY11 to Rs 9,671 m during the year due to the higher base effect and higher depreciation outgo. The higher base in FY10 was due to the onetime exceptional income of Rs 950 m on the sale of 'i-pill' brand in India to Piramal Healthcare. Sales from the new manufacturing facility in Indore SEZ were Rs 600 m with the total expenses being Rs 900 m. A huge part of this expense got captured in the form of higher depreciation charges that drained the bottomline. But, after excluding this exceptional income and the drain due to Indore SEZ facility, Cipla's bottomline would be flat when compared YoY.

  • The current field force stands at 6,000 with 500 being recruited in the last 6 months. The management has expressed willingness to increase its field force time to widen its market presence and further penetrate in the existing cities and towns in India. New products were added in the Oncology and Neo-Psychiatry.

What to expect?
At the current price of Rs 303, the stock is trading at a price to earnings multiple of 15.8 times our estimated FY13 earnings. We believe that Cipla's focus on contract manufacturing will get further steam and the management has also suggested about new possible partnerships. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands. The future outlook for Cipla looks fine and with the fall in price from the higher level, we maintain a HOLD at current price.

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