May 14, 2012 - Cipla: Favourable mix boosts margins
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.