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Cipla: One-offs impact the bottomline - Views on News from Equitymaster
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Cipla: One-offs impact the bottomline
Jun 5, 2015

Cipla has announced its 4QFY15 results. The company has reported 22% YoY growth in sales and a decline of 0.4% YoY in the net profits. Here is our analysis of the results.

Performance summary
  • Net sales witnessed healthy growth of 22% YoY during the quarter led by growth in its domestic and export formulations.
  • Operating margins, including other operating income, improved marginally by 0.2% to 16.4% for the quarter.
  • The bottomline was impacted by a rise in depreciation, taxes and higher minority interest.

Financial performance: A snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 24,431 29,807 22.0% 98,258 108,824 10.8%
Other operating income 902 1,120 24.2% 3,476 4,630 33.2%
Expenditure 21,241 25,850 21.7% 80,367 91,837 14.3%
Operating profit (EBDITA) 4,092 5,077 24.0% 21,367 21,617 1.2%
EBDITA margin (%) 16.2% 16.4%   21.0% 19.1%  
Other income 775 612 -21.1% 2,654 1,656 -37.6%
Interest (net) 341 434 27.1% 1,457 1,683 15.5%
Depreciation 1,050 1,357 29.2% 3,762 5,047 34.1%
Minority interest 117 271 132.1% 283 735 160.0%
Profit before tax 3,360 3,627 8.0% 18,518 15,808 -14.6%
Tax 753 1,030 36.8% 4,638 4,000 -13.8%
Profit after tax/(loss) 2,607 2,597 -0.4% 13,880 11,808 -14.9%
Net profit margin (%) 10.3% 8.4%   13.6% 10.4%  
No. of shares (m)         840.3  
Diluted earnings per share (Rs)         14.7  
Price to earnings ratio (x)*         44.4  
Price to earnings ratio (x)*
*based on trailing 12 months earnings

What has driven performance in 4QFY15?
  • Cipla's topline (including operating income) grew by 22% YoY.

    Consolidated Business Snapshot
    (Rs mn) 4QFY14 4QFY15 Change FY14 FY15 Change
    Domestic 9,000 10,860 20.7% 40,911 48,251 17.9%
    Exports
    Formulations 13,031 16,897 29.7% 49,827 54,258 8.9%
    API 2,400 2,050 -14.6% 7,520 6,315 -16.0%
    Total exports 15,431 18,947 22.8% 57,347 60,573 5.6%
    Total gross sales 24,431 29,807 22.0% 98,258 108,824 10.8%

  • Cipla's domestic business grew by 20.7% YoY for 4QFY15. The company's growth was above the industry growth of 12% for the quarter. The company has been able to increase the market share in the current fiscal. Cipla's domestic market share in FY14 was 5.27%, this has now increased to 5.57% in FY15.

  • On the exports front, the formulations witnessed good growth at 29.7% YoY, as the supply constraints on the API front eased. 3QFY15 had witnessed pressures due to supply bottlenecks. The company has launched its own products in the US market from this quarter. Surprisingly, the company hardly saw any revenues from the supply of Nexium (currently Cipla's partner Teva is the only generic company selling this product in the US market) in the current quarter. As per the management, the company there is one quarter lag in accounting these revenues. Hence, impact of Nexium sales will be witnessed in the upcoming quarters. The respiratory portfolio is doing well and currently Cipla has approx 15% market share by volume in the European countries so far.

  • Though the operating margins were almost flat for the quarter, they were impacted by higher R&D spend during the current quarter. The R&D expenses as % of sales stood at 8% for quarter vs 6.2% for the full year. Further, the margins were impacted due to one-off costs incurred in Sri Lanka and Yemen.

  • Higher depreciation and taxes impacted bottomline growth. Due to change in depreciation policy, the company has booked higher depreciation for the quarter and the year.
What to expect?

At the current price of Rs 652, the stock is trading at a price to earnings multiple of 24.3 times our estimated FY17 earnings. Since the last few quarters, we have been seen the company increasing expenditure as it is shifting its business model to the front end. The company has already has a front end presence in 17 geographies so far. This has impacted the company's margins and revenues to some extent. On the business front, Cipla is expected to witness good growth in domestic market, owing to leadership in its therapies. However, increasing competition cannot be ruled out too. This is particularly true for the Respiratory space. This area is quite niche, however, many global generic companies are looking to compete in this space.

The company has been actively filing for lucrative products across geographies. This is expected to increase its R&D costs too. Other than Nexium, Pulmicort Repsules (Market size approx US$ 1 bn annually in US) can be an important opportunity for the company in the US market.

Cipla has already launched some inhaler based drugs in Europe and the emerging markets. In the long term, increasing the market share of these drugs will be an important milestone. Overall, we reiterate our Hold rating on 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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