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Cipla: Favourable mix boosts margins
May 14, 2012

Cipla announced fourth quarter results of financial year 2011-2012 (4QFY12). The company reported a 12% YoY and 36% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 12% YoY in 4QFY12 led by growth in both the domestic and export formulations businesses.
  • EBDITA margins improve by 4% to 21.4% due to a substantial fall in raw material costs (as percentage of sales).
  • Strong growth at the operating level percolates down to the bottomline which grows by 36% YoY.

Financial performance: A snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 16,677 18,656 11.9% 63,311 69,775 10.2%
Expenditure 13,775 14,668 6.5% 50,104 53,956 7.7%
Operating profit (EBIDTA) 2,903 3,988 37.4% 13,207 15,819 19.8%
Operating profit margin (%) 17.4% 21.4%   20.9% 22.7%  
Other income 322 390 20.9% 912 1,483 62.6%
Interest 18 23 24.3% 125 266 113.4%
Depreciation 697 705 1.2% 2,480 2,821 13.7%
Profit before tax 2,510 3,650 45.4% 11,514 14,215 23.5%
Tax 370 733 98.1% 1,910 2,975 55.8%
Profit after tax/ (loss) 2,140 2,917 36.3% 9,604 11,240 17.0%
Net profit margin (%) 12.8% 15.6%   15.2% 16.1%  
No. of shares (m)       802.9 802.9  
Diluted earnings per share (Rs)         14.0  
P/E ratio (x)**         22.8  
** on a trailing 12 months basis

What has driven performance in 4QFY12?
  • Cipla clocked a decent 12% YoY topline growth during 4QFY12. Growth was largely led by the domestic business, which grew by 15.5% YoY. However, exports growth was relatively lower at 11% YoY. This was on account of the poor performance of the API business, which declined by 1% YoY. The exports formulations business did well though to grow by 15% YoY. For both the domestic and the exports formulations businesses, inhalers largely contributed to growth.

    Business snapshot
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Domestic 6,522 7,536 15.5% 28,224 32,129 13.8%
    Exports            
    - Formulations 7,428 8,551 15.1% 26,823 29,677 10.6%
    - APIs 2,322 2,299 -1.0% 6,792 7,244 6.6%
    Total exports 9,750 10,850 11.3% 33,615 36,920 9.8%
    Total sales 16,272 18,385 13.0% 61,839 69,049 11.7%
    Other operating income            
    - Technology knowhow/fees 207 56 -73.0% 637 310 -51.3%
    - Others 386 459 18.8% 1,512 1,387.9 -8.2%
    Total 594 515 -13.2% 2,149 1,698 -21.0%
    Total income from operations 16,865 18,900 12.1% 63,987 70,747 10.6%

  • Operating margins improved by 4% to 21.4% largely due to a significant fall in raw material costs (as percentage of sales). It must be noted that during this quarter there was a lower proportion of anti-retrovirals (ARVs), which typically have lower margins. Thus, higher proportion of high margin products and better realisations led to the improvement in overall operating margins. Staff costs (as percentage of sales) increased on account of annual increments and increase in manpower. The rise in other expenditure was attributed to increased marketing expenses, professional fees and travel expenditure.

  • Strong growth at the operating level percolated down to the bottomline which grew by an impressive 36% YoY. Having said that, growth was lower than the 45% YoY growth in profit before tax (PBT) on account of significant increase in tax expenses. Tax for the current quarter increased mainly due to expiry of tax benefits on export oriented units (EOUs).

What to expect?
At the current price of Rs 319, the stock is trading at a price to earnings multiple of 16 times our estimated FY14 earnings. We believe that Cipla's focus on contract manufacturing will get further steam and the management has also suggested about new possible partnerships. The company is planning to introduce 25 to 30 products every year in the domestic market and thus leverage its domestic reach. Having said this, Cipla has started facing competition in some of its products. The company is also looking to gain an advantage with the ramp up of exports through the Indore SEZ facility. Further, it has substantial ANDA filings in the US through its partners, which should also provide a fillip to its US business. Overall, we maintain a HOLD on the stock at the current price.

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