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Cipla: Profits trump sales

May 10, 2010

Cipla has announced its FY10 results. The company has reported 7% YoY and 39% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 7% YoY in FY10 led by the domestic and export formulation businesses.
  • EBDITA margins expand by 4.5% due to lower raw material costs and other expenditure (as percentage of sales).
  • Bottomline grows 39% YoY during the year largely bolstered by strong performance at the operating level, lower interest costs and extraordinary income on sale of ‘i-pill.'

Financial performance: A snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales     13,627     13,747 0.9%     52,570      56,300 7.1%
Expenditure     10,136     11,167 10.2%     42,209      42,698 1.2%
Operating profit (EBIDTA)       3,492       2,580 -26.1%     10,361      13,602 31.3%
Operating profit margin (%) 25.6% 18.8%   19.7% 24.2%  
Other income   155   451 191.8%   698    877 25.7%
Interest     133  5 -96.5%   340    237 -30.3%
Depreciation   557   495 -11.1%       1,706        1,888 10.6%
Profit before tax       2,957       2,531 -14.4%       9,013      12,355 37.1%
Exceptional items -      950   -       950  
Tax   428   726 69.8%       1,245        2,485 99.6%
Profit after tax/ (loss)       2,529       2,755 8.9%       7,768      10,820 39.3%
Net profit margin (%) 18.6% 20.0%   14.8% 19.2%  
No. of shares (m)             777.3        802.9  
Diluted earnings per share (Rs)*           12.3  
P/E ratio (x)           26.3  
* excluding forex losses

What has driven performance in FY10?
  • Cipla clocked a subdued 7% YoY topline growth during FY10. The domestic business did reasonably well to grow by 10%. However, exports performance was muted with sales growing by a mere 6% YoY. While exports formulations grew by 7% YoY, exports API growth was flat. Technology fees also reduced during the year mainly on account of the high base effect last year.

    Business snapshot
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Domestic 5,245 5,688 8.5%     22,790      25,113 10.2%
    - Formulations 5,553 6,139 10.6%     21,619      23,188 7.3%
     - APIs 1,689 1,463 -13.4% 5,808   5,802 -0.1%
    Total exports      7,242      7,602 5.0%   27,427    28,989 5.7%
    Total sales    12,487 13,290 6.4%   50,216    54,103 7.7%
    Other operating income            
    - Technology knowhow/fees     999     136 -86.4% 2,178   1,603 -26.4%
    - Others     276     437 57.9%     787     1,116.3 41.9%
    Total      1,275    572 -55.1%     2,964 2,719 -8.3%
    Total income from operations    13,762   13,862 0.7%   53,181    56,822 6.8%

  • Operating margins expanded by 4.5% to 24.2% largely due to a fall in raw material costs and other expenditure (as percentage of sales). Raw material costs fell from 45% in FY09 to 44.1% in FY10 largely due to a change in product mix. Drop in other expenses by 4% also did its part in bolstering margins. Staff costs were, however, higher on account of overall increase in manpower as well as annual increments.

  • The bottomline grew by 39% YoY due to a strong show at the operating level, lower interest costs and extraordinary income received during the year. Interest costs reduced during the year due to repayment of short-term working capital loans and fixed deposits availed by the company. Cipla had signed an agreement with Piramal Healthcare for the sale of intellectual property rights in India related to the brand ‘i-pill' for a consideration of Rs 950 m. Thus, even after excluding this extraordinary income, Cipla's bottomline growth was still strong at 27% YoY during the year.

What to expect?
At the current price of Rs 323, the stock is trading at a price to earnings multiple of 17.3 times our estimated FY12 earnings. We believe that Cipla's focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential especially in FY12 when the number of drugs going off patent is considerable. 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. Overall, valuations are on the higher side with not much upside.

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