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Cipla: Consistency maintained! - Views on News from Equitymaster
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Cipla: Consistency maintained!
Jul 22, 2006

Performance summary
Cipla has announced robust results for the first quarter ended June 2006. The impressive topline growth has been led by strong performance in both its domestic and exports businesses. Margins have also expanded sharply on the back of cost control on all fronts. All these factors put together have contributed to the robust bottomline growth.

Financial performance: A snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 6,628 8,636 30.3%
Expenditure 5,129 6,347 23.7%
Operating profit (EBIDTA) 1,499 2,289 52.7%
Operating profit margin (%) 22.6% 26.5%  
Other income 84 220 162.6%
Interest 14 28 103.6%
Depreciation 135 260 92.6%
Profit before tax 1,434 2,220 54.8%
Tax 320 516 61.3%
Profit after tax/ (loss) 1,114 1,704 53.0%
Net profit margin (%) 16.8% 19.7%  
No. of shares (m) 299.9 777.2  
Diluted earnings per share (Rs)*   8.5  
P/E ratio (x)*   25.9  
(* 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 1QFY07?
Balanced revenue growth: Cipla clocked an impressive 30% YoY growth in topline during the quarter, which was driven by both its domestic and exports businesses. The domestic business grew by 20% YoY led by a strong performance of its anti-asthmatics, anti-retrovirals and anti-biotics segments. Exports also reported a robust 38% YoY growth largely contributed by its formulations exports, which were up 48% YoY. API exports sales, however, grew by a staid 8% YoY. Nevertheless, these exports are expected to pick up on the back of a large number of drugs going off-patent in the US market and Cipla’s strong tie-ups with generic companies.

Business snapshot
  1QFY06 1QFY07 Change
Domestic 3,940 4,729 20.0%
Exports      
- Formulations 2,154 3,187 48.0%
- APIs 694 752 8.4%
Total exports 2,847 3,938 38.3%
Total sales 6,787 8,667 27.7%
Other operating income      
- Technology knowhow/fees 59 90 54.2%
- Others 163 112 -31.4%
Total 222 202 -8.8%
Total income from operations 7,009 8,869 26.5%

Margins expand:

Cost break-up
(% of sales) 1QFY06 1QFY07
Raw material cost 47.5% 44.8%
Staff cost 5.9% 5.9%
Other expenditure 23.9% 22.8%
Operating margins expanded by 390 basis points during the quarter on the back of tight control wielded on costs by the company. A strong growth recorded by formulations exports could also have contributed to the margin improvement, as they tend to enjoy better margins as compared to APIs. Going forward, we expect Cipla to maintain margins at 23% levels given the fact that API exports will increase as the company begins supplying bulk drugs once its partners receive product approvals.

The bottomline picture: Bottomline growth (up 53% YoY) outpaced topline growth during the quarter despite a significant rise in depreciation charges and interest costs. Besides strong performances at the topline and the operating level, an increase in other income also aided this growth. Other income primarily increased on account of foreign exchange gains and interest income. Depreciation, however, witnessed a rise due to substantial additions to assets made by Cipla in FY06.

Over the quarters: Cipla’s growth at both the topline and bottomline level has been commendable outpacing most of its peers in the pharma industry. This is due to its low-risk strategy of supplying bulk drugs to global generic companies. As its partners begin to receive ANDA approvals in the generic markets, we expect Cipla’s bulk drugs exports to pick up pace going forward.

Quarterly trend
  1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Net sales growth 24.2% 15.5% 30.9% 62.7% 30.3%
Operating profit margin 22.6% 26.4% 20.4% 20.7% 26.5%
Net profit growth 40.5% 27.9% 39.5% 80.7% 53.0%

What to expect?
At the current price of Rs 220, the stock is trading at a price to earnings multiple of 18.6 times our estimated FY08 earnings. Cipla has significantly increased its international operations and we believe that, on the exports front, the company will be a strong performer as it has adopted a low-risk strategy of supplying bulk drugs to generic companies like Ivax and Watson. We believe that this focus on contract manufacturing shall gather momentum going forward, keeping in mind the generics potential in the coming years. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands. Investors should hold on to the stock from a long-term perspective.

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