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Cipla: Margins remain under pressure - Views on News from Equitymaster
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Cipla: Margins remain under pressure
Jun 5, 2014

Cipla has announced its 4QFY14 results. The company has reported 26.7% YoY growth in net sales and a decline of 5.7% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 27.3% YoY during the quarter led by growth in its domestic and export formulations. Some part of the growth was also driven by Cipla Medpro acquisition. Sales from Cipla Medpro are consolidated for 9 months in FY14.
  • Operating margins decline by 5.3% to 16.2% during the quarter, led by higher contribution of low margin ARV products from Medpro and increase in operating expenses.
  • Bottomline declines by 5.7% YoY during 4QFY14, on the back of poor performance at the operating level, higher interest costs and depreciation charges.

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 19,170 24,293 26.7% 80,868 97,528 20.6%
Other operating income 617 902 46.4% 1,925 3,476 80.6%
Expenditure 15,529 21,103 35.9% 60,815 79,673 31.0%
Operating profit (EBDITA) 4,258 4,093 -3.9% 21,979 21,331 -2.9%
EBDITA margin (%) 21.5% 16.2%   26.5% 21.1%  
Other income 566 776 37.1% 2,221 2,654 19.5%
Interest (net) 187 341 82.1% 339 1,457 329.8%
Depreciation 851 1,050 23.4% 3,305 3,726 12.8%
Exceptional item - -   397 -  
Profit before tax 3,785 3,477 -8.1% 20,953 18,801 -10.3%
Tax 1,027 753 -26.7% 5,443 4,634 -14.9%
Minority Int and Share from asso (7) 117   62 283 354.9%
Profit after tax/(loss) 2,765 2,607 -5.7% 15,448 13,885 -10.1%
Net profit margin (%) 14.0% 10.3%   18.7% 13.7%  
No. of shares (m)         840.3  
Diluted earnings per share (Rs)         17.3  
Price to earnings ratio (x)*         22.4  
*based on trailing 12 months earnings

What has driven performance in 4QFY14?
  • Cipla's topline grew by 27.3% YoY during the quarter led by growth in both international and domestic formulations and higher operating income.

    Consolidated Business Snapshot
    (Rs mn) 4QFY13 4QFY14 Change
    Domestic 7,610 9,080 19.3%
    Exports 9,810 12,820 30.7%
    Total formulations 17,420 21,900 25.7%
    Export API 1,750 2,390 36.6%
    Total sales 19,170 24,290 26.7%

  • Cipla's domestic business grew by 19.3% YoY for 4QFY14. The company witnessed good traction in its domestic branded business.

  • The export formulations segment witnessed growth of 30.7% YoY for the quarter. Large part of growth in export market is attributable to Medpro acquisition. While the company has not shared the organic growth, we believe the growth will be approximately 2-3% for the quarter and almost flattish for the full year. This growth is derived based on the sales of Medpro of approximately US$ 60-65 m for the quarter. Among the various other markets, the company continued to make launches through partners. In the US, the company is now looking to launch Xopenox through its partner. The brand size of this drug is approximately US$ 400 m and two generic companies have already launched their drugs, hence we do not expect higher upside for Cipla.

  • Operating margins declined by 5.3% to 16.2% during the quarter, led by higher contribution of low margin ARV products from Medpro and increase in operating expenses. Having said that, Cipla expects improvement in margins in the next few quarters. For FY15, the management has given margin guidance of 21% from the current levels with top line growth in mid teens. Over the next 2-3 years, the company remains confident of improvement in margins.

  • Bottomline declined by 5.7% YoY during 4QFY14, on back of poor performance at the operating level, higher interest costs and depreciation charges.
What to expect?
At the current price of Rs 387, the stock is trading at a price to earnings multiple of 14.5 times our estimated FY16 earnings. Cipla will continue to garner good market share in the Indian domestic market on the back of new launches and increase in market share of its top selling brands and therapies. As far as exports are concerned, the company is looking to transform its business to a front end model. The acquisition of Medpro has also been done in line with its strategy of establishing a front end focus in the South African market. Hence, because of this transition, expenses have mounted as a result of which the overall margins of the company have sharply declined. This is expected to continue for the next few quarters.

Further, Cipla is also eyeing inhaler opportunities in the international markets. However, we are not too enthused about this opportunity given various challenges. While management is confident of margins improving, the next couple of quarters would provide a clearer picture of how well the company is able to bring about a revival at the operating level. Overall, we are of the view that investors should not buy the stock at the current price levels. However, those who have the stock in their portfolio can hold on to the same.

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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