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Cipla: Growth hampered! - Views on News from Equitymaster
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Cipla: Growth hampered!
Jul 21, 2007

Performance summary
  • Revenues grow by a staid 5% YoY due to considerably lower growth in exports (up by a mere 2% YoY).

  • EBDITA margins contract by 880 basis points (8.8%).

  • PAT declines by 30% YoY led by the poor performance at both the topline and the operating profit level.

  • Announces dividend of Rs 2 per share – dividend yield of 1%.

Financial performance: A snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 8,601 9,018 4.9%
Expenditure 6,312 7,411 17.4%
Operating profit (EBIDTA) 2,289 1,607 -29.8%
Operating profit margin (%) 26.6% 17.8%  
Other income 220 185 -15.5%
Interest 28 8 -70.6%
Depreciation 260 303 16.3%
Profit before tax 2,220 1,482 -33.3%
Tax 516 284 -45.0%
Profit after tax/ (loss) 1,704 1,198 -29.7%
Net profit margin (%) 19.8% 13.3%  
No. of shares (m) 777.2 777.2  
Diluted earnings per share (Rs)*   7.8  
P/E ratio (x)*   25.6  
(* on a trailing 12-months basis)      

What is the company’s business?
Cipla is the second largest pharma company in the domestic retail market (ORG survey) and has presence in formulations and bulk drugs manufacturing. All the bulk drug manufacturing facilities of the company have been approved by the US FDA and the formulation facilities have been approved by the Medicine Control Agency (UK), the Medicine Control Council (South Africa), the Therapeutic Goods Administration (Australia) and other international agencies. On the exports front, the company has strategic alliance with major generic manufactures such as Watson, Mylan, Barr and Ivax for supply of bulk drugs. It has a very wide product range in the domestic market, which includes antibiotics, anti-bacterial, anti-asthmatics, anti-inflammatory, antiretroviral, anti-cancer and cardiovascular. The company also concentrates on developing specialty bulk drugs for export markets.

What has driven performance in 1QFY08?
Exports, domestic sales fail to deliver: Cipla clocked a lackluster 5% YoY topline growth during 1QFY08, led by dismal performances of both its domestic and exports businesses. Domestic sales grew by a mere 7% YoY. The company attributed this to lower stocking of certain older brand of products at the primary level. Rupee appreciation played spoilsport to Cipla’s export revenues, which recorded a muted 2% YoY growth. While API exports grew by 9% YoY, growth in formulation exports was much lower at 1% YoY.

Business snapshot
(Rs m) 1QFY07 1QFY08 Change
Domestic 4,729 5,054 6.9%
- Formulations 3,187 3,203 0.5%
- APIs 752 816 8.5%
Total exports 3,938 4,019 2.1%
Total sales 8,667 9,073 4.7%
Other operating income      
- Technology knowhow/fees 90 113 25.7%
- Others 112 102 -8.8%
Total 202 216 6.6%
Total income from operations 8,869 9,288 4.7%

Operating margin scenario: Operating margins shrank considerably by 880 basis points (8.8%) due to rise in all cost heads (as percentage of sales) leading to a 30% YoY fall in operating profits. Raw material costs, as percentage of sales, increased due to a change in the product mix. Other expenditure (as percentage of sales) during the quarter also rose on account of overall increase in manufacturing expenses, repairs and maintenance and travel expenditure. The rise in the latter was due to expenses for recruitment and training and one-time expenditure for international conferences. Increase in staff costs was attributed to the annual increments and an overall increase in manpower.

Cost break-up
(% of sales) 1QFY07 1QFY08
Raw material cost 44.9% 49.8%
Staff cost 6.0% 7.2%
Other expenditure 22.5% 25.2%

Muted bottomline: Poor performances both at the topline and the operating profit level have contributed to the 30% YoY fall in the bottomline despite a lower tax outgo. The effective tax rate decreased from 23.2% in 1QFY07 to 19.2% in 1QFY08 owing to the tax incentives available for the export-oriented units and for the company’s Baddi manufacturing unit.

Over the quarters: Cipla’s performance in the last three quarters has witnessed a slowdown largely due to the poor performance of its exports. This in turn has impacted the operating margins of the company. While the performance of the company during the quarter has been much lower than our estimates for the full year, we nevertheless expect exports to scale up going forward as its generic partners get more ANDA approvals.

Quarterly trend
  4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Net sales growth 62.7% 30.3% 33.3% 12.4% 6.3% 4.9%
Operating profit margin 20.7% 26.5% 25.4% 24.9% 15.7% 17.8%
Net profit growth 80.7% 53.0% 45.8% 5.2% -34.1% -29.7%

What to expect?
At the current price of Rs 200, the stock is trading at a price to earnings multiple of 14.2 times our estimated FY10 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. However, in the longer term, the company’s minimal focus on R&D is likely to remain a cause for concern. Given the fact that the performance of the company for the quarter has been much lower than our estimates for the full year, we shall have to revise our export numbers. Overall, we maintain our positive view on the stock.

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