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Cipla: Muted performance - Views on News from Equitymaster

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Cipla: Muted performance

May 30, 2013

Cipla has announced its 4QFY13 results. The company has reported 5% YoY growth in sales and a decline of 8.3% in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 5% YoY during the quarter led by growth in its export formulations segment.
  • Operating margins decline by 0.6% to 20.8% in 4QFY13 due to subdued topline growth.
  • Bottomline declines by 8.3% YoY during 4QFY13, due to surge in interest costs and tax expenses.

Financial performance: A snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 18,141 19,062 5.1% 68,077 80,002 17.5%
Other operating income 515 605 17.4% 1,769 1,871 5.7%
Expenditure 14,668 15,572 6.2% 53,956 60,681 12.5%
Operating profit (EBDITA) 3,988 4,095 2.7% 15,890 21,191 33.4%
EBDITA margin (%) 21.4% 20.8%   22.7% 25.9%  
Other income 390 585 50.1% 1,266 2,291 81.0%
Interest (net) 23 176 683.6% 121 334 175.4%
Depreciation 705 783 11.1% 2,821 3,030 7.4%
Profit before tax 3,650 3,720 1.9% 14,214 20,119 41.5%
Tax 733 1,045 42.5% 2,975 5,048 69.7%
Profit after tax/(loss) 2,917 2,676 -8.3% 11,239 15,071 34.1%
Net profit margin (%) 15.6% 13.6%   16.1% 18.4%  
No. of shares (m)         840.3  
Diluted earnings per share (Rs)         18.7  
Price to earnings ratio (x)*         20.7  

What has driven performance in 4QFY13?
  • Cipla's topline grew by a tepid 5% YoY during the quarter led by growth in the international formulations segment.

    Consolidated business snapshot
    (Rs mn) 4QFY12 4QFY13 Change FY12 FY13 Change
    Domestic 7,536 7,930 5.2% 32,129 36,812 14.6%
    - Formulations 8,551 9,540 11.6% 29,676 37,723 27.1%
    - API 2,299 1,750 -23.9% 7,243 6,520 -10.0%
    Total exports 10,850 11,290 4.1% 36,919 44,243 19.8%
    Total sales 18,385 19,220 4.5% 69,048 81,055 17.4%
    Other operating income
    - Technology know how fees 56 220 292.9% 310 491 58.4%
    - Others 459 555 20.8% 1,459 1,209 -17.1%
    Total 515 775 50.4% 1,769 1,701 -3.8%
    Total income from operations 18,900 19,995 5.8% 70,817 82,756 16.9%

  • Cipla's domestic business witnessed growth of 5.2% YoY for 4QFY13. Therapeutic areas of anti-asthma, antibiotics and cardiovascular contributed to the overall domestic growth. The quarter was challenging for the whole Indian pharma market. Cipla did not give any guidance on the impact of pricing policy. However as the company has a handful of top selling brands in the domestic market, going forward domestic revenues will get impacted.

  • International business grew by 4.1% YoY during 4QFY13. The export formulations segment witnessed lower growth of 4% for the quarter. Post expiry of 180-days exclusivity, 'Escitalopram' (Lexapro) contribution was insignificant during the quarter. Further, the Indore facility contributed revenues of Rs 6-7 bn for the quarter, for which the company had received approval in the previous quarter. Exports were also impacted due to lower sale in its tender business. The export API segment witnessed 23.9% decline in growth for the quarter. This was due to one off sales in 4QFY12 relating to supply of Lexapro API in the US.

  • Operating margins declined by 0.6% to 20.8% in 4QFY13 due to subdued topline growth. Due to lower contribution from high margin products, operating margins were impacted. Going forward, margin quality will be highly dependent on the type of launches the company makes in various segments.

  • Bottomline declined by 8.3% YoY during 4QFY13, due to surge in interest costs and tax expenses. The interest expense was high on account of increase in debt taken to fund the working capital. Going forward, this is expected to come down.

    Other updates:

    Front end presence: With an intention to increase its front end presence, the company is taking various steps. In Europe, Cipla is building up a team to market Cipla's products. In the US, it continues to file new ANDAs on its own. In FY13, the company had filed 5 new ANDAs on its own (unlike earlier when it used to do so with partners) and plans to file 10 more such ANDAs in FY14.

    Cipla's Medpro acquisition: Cipla will be closing the Medpro acquisition by 2QFY14 and thus revenues from Medpro will be consolidated for a few months for FY14.

    Continues to focus on API supply with partners: As part of its current strategy of supplying through partners, Cipla expects small API contracts from its partners in the upcoming period, which would include various small exclusive launches.

    Financial highlights:

    • Company has given top line guidance of double digit growth for FY14.
    • Tax rate for FY14 will be at 25%.
    • Capex incurred for FY13 will be Rs 7 bn and for FY14, the company has guided for capex of Rs 4 bn.

What to expect?
At the current price of Rs 387, the stock is trading at a price to earnings multiple of 18 times our estimated FY15 earnings. On the domestic front, the company's topline will get impacted due to the pricing policy. SEZ facility will help the company generate better topline growth.

Cipla is eyeing inhaler opportunities in the international markets and is also aiming for front end operations. Though the company will have better growth on the export front especially from ARV and US segment, the impact of pricing policy on domestic formulations, and ramp up in inhaler segment in developed markets will be major challenges. In light of these events, we recommend investors to HOLD on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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