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Cipla: Margins receive a big boost - Views on News from Equitymaster

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Cipla: Margins receive a big boost
Jul 29, 2009

Performance summary
  • Revenues grow by 14% YoY in 1QFY10 led by the export formulation business which grows by 29% YoY.
  • EBDITA margins substantially expand by 8.6% due to lower raw material costs and other expenditure (as percentage of sales).
  • Bottomline reports a splendid 73% YoY growth largely bolstered by the strong performance at the operating level. This is despite the surge in interest costs and tax expenses.


Financial performance: A snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 12,071 13,760 14.0%
Expenditure 10,117 10,345 2.3%
Operating profit (EBIDTA) 1,954 3,415 74.8%
Operating profit margin (%) 16.2% 24.8%  
Other income 170 120 -29.7%
Interest 37 105 186.1%
Depreciation 382 458 19.8%
Profit before tax 1,705 2,972 74.3%
Tax 305 555 82.0%
Profit after tax/ (loss) 1,400 2,417 72.6%
Net profit margin (%) 11.6% 17.6%  
No. of shares (m) 777.3 777.3  
Diluted earnings per share (Rs)*   11.2  
P/E ratio (x)   24.5  
* excluding forex losses

What has driven performance in 1QFY10?
  • Cipla clocked a 14% YoY topline growth during 1QFY10, largely led by the 29% YoY growth in its export formulations business. The growth in domestic sales though decent at 11% YoY was not as strong as the 15% growth that the company had been logging in the previous quarters. Revenues from the API business failed to impress as the same declined by 21% YoY during the quarter due to lower sales of certain key bulk drugs in the last three quarters.

    Business snapshot
    (Rs m) 1QFY09 1QFY10 Change
    Domestic 5,855 6,519 11.3%
    Exports      
    - Formulations 4,242 5,472 29.0%
    - APIs 1,773 1,404 -20.8%
    Total exports 6,015 6,876 14.3%
    Total sales 11,870 13,395 12.8%
    Other operating income      
    - Technology knowhow/fees 156 257 65.1%
    - Others 208 251 20.6%
    Total 364 508 39.7%
    Total income from operations 12,233 13,902 13.6%

  • Operating margins considerably expanded by 8.6% to 24.8% largely due to a fall in raw material costs and other expenditure (as percentage of sales). Raw material costs were lower on account of changes in the product mix and a favourable exchange rate as compared to that in 1QFY09. Other expenditure shrunk by 5.9% to 24.2% largely due to lower forex losses during the quarter. Forex loss this quarter stood at Rs 270 m as compared to Rs 750 m in 1QFY09. Thus, on excluding the same, operating margins still expanded by a robust 4%. Further, impact of the exchange rate also played a part in enhancing margins as exports were booked at the prevailing exchange rates.

  • The bottomline grew by 73% YoY and was bolstered by the superlative 75% YoY growth in operating profits. This is despite the surge in interest costs and tax expenses. Interest costs increased during the quarter due to short term working capital loans and fixed deposits availed by the company.

What to expect?
At the current price of Rs 274, the stock is trading at a price to earnings multiple of 15 times our estimated FY12 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. Having said that, in the longer term, the company’s minimal focus on R&D is likely to weigh heavy on its overall growth. Overall, we maintain our positive view on the stock.

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Jul 18, 2018 03:37 PM

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