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Cipla: Exports march ahead

Jul 18, 2008

Performance summary
  • Revenues grow by a robust 34% YoY in 1QFY09 due to strong performances by both the domestic and export businesses.
  • EBDITA margins expand substantially by 4.6% led by a fall in all costs (as percentage of sales).

  • Considerable forex losses and higher interest costs restrict the bottomline growth at 17% YoY.

  • Board recommends a dividend of Rs 2 per share (dividend yield of 1%).

Financial performance: A snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 9,018 12,071 33.9%
Expenditure 7,411 9,371 26.4%
Operating profit (EBIDTA) 1,607 2,701 68.1%
Operating profit margin (%) 17.8% 22.4%  
Other income 185 (576)  
Interest 8 37 346.3%
Depreciation 303 382 26.4%
Profit before tax 1,482 1,705 15.1%
Tax 284 305 7.4%
Profit after tax/ (loss) 1,198 1,400 16.9%
Net profit margin (%) 13.3% 11.6%  
No. of shares (m) 777.3 777.3  
Diluted earnings per share (Rs)   7.3  
P/E ratio (x)*   29.6  
* on a trailing 12 months basis

What has driven performance in 1QFY09?
  • Cipla clocked a robust 34% YoY topline growth during 1QFY09, led by strong performances of both its domestic and export businesses. Domestic sales grew by 16% YoY and were driven by the anti-asthmatics, cardiovascular, anti-biotics and anti-retrovirals segments. Export growth of 50% YoY during the quarter was attributed to the API and the formulations businesses growing by a healthy 117% YoY and 32% YoY respectively. Depreciation of the rupee against the dollar also played a part in augmenting the growth of exports.

    Business snapshot
    (Rs m) 1QFY08 1QFY09 Change
    Domestic 5,054 5,855 15.9%
    - Formulations 3,203 4,242 32.4%
    - APIs 816 1,773 117.4%
    Total exports 4,019 6,015 49.7%
    Total sales 9,073 11,870 30.8%
    Other operating income      
    - Technology knowhow/fees 113 156 37.1%
    - Others 102 208 103.6%
    Total 216 364 68.6%
    Total income from operations 9,288 12,233 31.7%

  • Operating margins expanded considerably by 460 basis points (4.6%) largely due to fall in all costs (as percentage of sales). The substantial fall in raw material costs (from 49.8% in 1QFY08 to 46.7% in 1QFY09) was attributed to improved export realisations as also changes in the product mix. While staff costs (as percentage of sales) remained stable, in absolute terms they increased by 31% YoY due to the annual increments and bonuses and addition of manpower at the new Sikkim unit.

  • The bottomline growth at 17% YoY was considerably slower than the 68% YoY growth in operating profits largely due to forex losses of Rs 750 m incurred by the company. The company had made provisions for the same on revaluation of forward contracts, outstanding debtors and foreign currency loans subsequent to the depreciation of the rupee against the dollar. Excluding the foreign exchange impact during both the quarters, the bottomline jumped 93% YoY. The effective tax rate for the quarter was lower at 18% (19.2% in 1QFY08) due to tax incentives availed for EOUs, Baddi and the new plant at Sikkim, which commenced commercial production during the quarter.

What to expect?
At the current price of Rs 216, the stock is trading at a price to earnings multiple of 15.4 times our estimated FY11 earnings. We believe that Cipla’s focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands. API exports have recovered considerably and have posted good growth in the last three quarters, which is a positive sign. Having said that, in the longer term, the company’s minimal focus on R&D is likely to weigh heavy on its overall growth. At the current levels and after factoring in the FY11 numbers, we advise investors to hold on to the stock from a three-year perspective.

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