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Cipla: Margins under pressure

Aug 4, 2003

Domestic pharma major, Cipla announced its first quarter FY04 results recently. While the company has posted a 13% increase in the topline, a marginal drop in the operating efficiency has restricted the company's bottomline growth at 11%. Let us briefly evaluate the performance of the company during 1QFY04.

(Rs m) 1QFY03 1QFY04 Change
Net Sales 4,030 4,542 12.7%
Other Income 48 67 39.7%
Total expenditure 3,207 3,669 14.4%
Operating Profit (EBDIT) 823 874 6.2%
Operating Profit Margin (%) 20.4% 19.2%  
Interest 2 10 330.4%
Depreciation 70 88 25.0%
Profit before Tax 798 843 5.6%
Tax 192 171 -10.9%
Profit after Tax/(Loss) 606 672 10.8%
Net profit margin (%) 15.0% 14.8%  
No. of Shares (m) 60.0 60.0  
Earnings per share* 40.4 44.8  
Current P/e ratio   18.0  
*(annualised)      

Cipla recorded a healthy growth in the net sales. However, a 25% rise in the raw material expense has affected the margins of the company. Raw material cost as a percentage of sales has gone up from 44% in 1QFY03 to 49% in the current quarter. This was primarily due to the change in the product mix of the company. Depreciation charges were also on the higher side on account of provision being made for the second phase of the Goa unit, which commenced commercial production during the quarter under review. Other income increased due to higher export benefits received during the current quarter. A drop in operating profit margins, sharp rise in the interest cost and a drop in the tax provisions on account of Sec 80I benefits have resulted in Cipla registering an 11% rise in net profits. Let us now study the revenue break up of the company.

Revenue break-up
(Rs m) 1QFY03 1QFY04 Change
Domestic 2,624 3,054 16.4%
Exports:      
Formulations 507 884 74.3%
Bulk drugs 882 562 -36.3%
Other operating income 16 42 161.1%
Total 4,030 4,542 12.7%

A close examination of the revenues indicates that although the export of formulations saw a steep rise, bulk drugs exports registered a sharp decline. This was on account of postponement of purchases by customers due to delay in patent rulings. On the domestic front, Cipla managed to outperform the industry with strong performance in the anti-biotic, anti-asthmatics and anti-hypertensives segments. The company has launched ‘Tiotropium’, a dry powder inhaler in the anti-asthma segment during the current quarter. Exports of formulations have seen a 74% growth. The growth was fuelled by good performance in the anti-AIDS segment.

Cipla has indicated that the export of CFC - free inhalers to Europe will commence as soon as the required regulatory approvals are received. However, the company has refused to give a time frame within which it expects to receive the requisite approval.

At Rs 807, Cipla is trading at a P/E of 18x its 1QFY04 earnings. Given the company’s ability to outperform in the domestic markets and the likely approval for export of CFC - free inhalers, the prospects of the company seem bright. However, delay in regulatory approval for products for which Cipla is the bulk drugs supplier and the uncertainty in respect of DPCO remain a cause for concern.


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