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Cipla: Formulating growth story! - Views on News from Equitymaster
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Cipla: Formulating growth story!
Jul 25, 2005

Performance summary
Cipla has announced strong results for the first quarter ended June 2005. While strong growth in formulations exports has boosted the topline for the quarter, improved product mix and cost efficiency has led to an expansion in operating margins. This has trickled down to the bottomline, which has posted a healthy 40% YoY growth.

Financial performance: A snapshot
(Rs m) 1QFY05 1QFY06 Change
Net sales 5,335 6,628 24.2%
Expenditure 4,267 5,129 20.2%
Operating profit (EBIDTA) 1,068 1,499 40.4%
Operating profit margin (%) 20.0% 22.6%  
Other income 119 84 -29.4%
Interest 14 14 0.0%
Depreciation 130 135 3.8%
Profit before tax 1,043 1,434 37.5%
Tax 250 320 28.0%
Profit after tax/ (loss) 793 1,114 40.5%
Net profit margin (%) 14.9% 16.8%  
No. of shares (m) 299.9 299.9  
Diluted earnings per share (Rs)* 10.6 14.9  
P/E ratio (x)   23.0  
(* annualised)      

What is the company’s business?
Cipla is the largest pharma company in the retail market according to the latest ORG survey. The company 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 for 1QFY06?
Recovery in domestic sales:  After taking a hit in the previous quarter on account of VAT and MRP-based concerns pertaining to excise duty, domestic sales recovered and posted a strong 12% YoY growth in 1QFY06. Among the major segments, the anti-AIDS, anti-asthmatics, cardiovascular, anti-hypertensives & anti-biotics segments have performed well in the domestic market. Cipla has been an outperformer in the domestic market over the years and has improved its profitability.

Exports- a winner:  Cipla’s exports grew at a scorching pace in 1QFY06. The healthy 40% YoY growth in exports was due to the fact that formulation exports continued to be buoyant, clocking 52% growth during the quarter. API exports staged a strong comeback during the quarter (up 13% YoY as against a 49% YoY decline in the previous quarter). The anti-AIDS, anti-cancer, and anti-asthmatics segments performed well in the exports market. Exports in 1QFY06 contributed 42% to the company’s revenues.

Business snapshot
  1QFY05 1QFY06 Change
Domestic 3,531 3,940 11.6%
Exports      
Formulations 1,418 2,153 51.8%
APIs 614 694 13.0%
Total exports 2,032 2,847 40.1%
Total sales 5,562 6,787 22.0%
Other operating income      
Technology knowhow/fees 73 59 -19.2%
Others 47 163 246.8%
Total 120 222 85.0%
Total income from operations 5,682 7,009 23.4%

Improvement in operating margins:  Cipla expanded its operating margins in the quarter. This was largely owing to the fall in raw material costs as a percentage of sales. Raw material costs were lower YoY mainly on account of higher contribution of exports (formulations and APIs). Improved product mix has also led to the margin expansion. During the quarter, the increase in other expenses was mainly due to increased manufacturing overheads including power & fuel and stores & spares. Staff cost also increased due to an overall increase in head count and increase in managerial remuneration.

Cost break-up
  1QFY05 1QFY06 Change
Raw material 2,706 3,150 16.4%
(as % of sales) 50.7% 47.5%  
Staff cost 302 392 29.8%
(as % of sales) 5.7% 5.9%  
Other expenditure 1,259 1,587 26.1%
(as % of sales) 23.6% 23.9%  
Total 4,267 5,129  

Consequently bottomline blooms:  Despite the fall in other income, strong revenues and improved operating margins provided a kicker to the bottomline, which grew 40% YoY. Tight control over interest costs and lower depreciation charges also aided the bottomline growth.

What to expect?
At the current price of Rs 341, the stock is trading at a price to earnings multiple of 18.7 times our estimated FY07 earnings. The management has declared a dividend of Rs 3.5 per equity share (dividend yield of 1%). Cipla is significantly increasing its international operations and we believe that, on the exports front, the company will be a strong performer due to its long standing in the industry and technological skills. Also, being one of the most efficient producers of bulk drugs, Cipla is likely to maintain margins in the international markets, where it has adopted a low risk strategy of supplying bulk drugs to generic companies like Ivax and Watson. In the domestic market, the company is likely to maintain its strength with its strong field presence and strong brands.

We had recommended a ‘Buy’ on the stock in May 2005 at Rs 272 with a target price of Rs 442 from a long-term perspective. Considering the current growth momentum and bright future prospects of the company, we maintain our view on the stock.

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