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Cipla: Strong topline growth

Aug 12, 2013

Cipla has announced the results for the first quarter of financial year 2013-14 (1QFY14). The company has reported 19% YoY growth in sales and 18.5% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 25.2% YoY during the quarter led by growth in domestic and export formulations and technology income.
  • Operating margins declined marginally by 0.2% to 27.4% during the quarter. This was due to higher contribution from high margin product escitalopram in 1QFY13, which was not there for the current quarter. The margins were also impacted due to increase in overall operating expenses.
  • Bottomline increases by 18.5% YoY during 1QFY14, the growth is impacted due to surge in interest costs, and tax expenses during the quarter.

(Rs m) 1QFY13 1QFY14 Change
Net sales 19,220 22,847 18.9%
Other operating income 408 1,791 338.9%
Expenditure 14,217 17,885 25.8%
Operating profit (EBDITA) 5,412 6,753 24.8%
EBDITA margin (%) 27.6% 27.4%  
Other income 531 691 30.3%
Interest (net) 24 408 1577.4%
Depreciation 728 789 8.3%
Profit before tax 5,190 6,248 20.4%
Tax 1,182 1,500 26.8%
Profit after tax/(loss) 4,007 4,748 18.5%
Net profit margin (%) 20.4% 19.3%  
No. of shares (m)     840.3
Diluted earnings per share (Rs)     19.6
Price to earnings ratio (x)*     21.2
*based on trailing 12 months earnings

What has driven performance in 1QFY14?
  • Cipla's topline grew by 25.2 YoY during the quarter led by the growth in the international and domestic formulations segment and other operating income.

    Consolidated Business Snapshot
    (Rs mn) 1QFY13 1QFY14 Change
    Domestic 9,697 11,321 16.7%
    Formulations 8,101 10,344 27.7%
    API 1,685 1,463 -13.2%
    Total Exports 9,786 11,807 20.7%
    Total Sales 19,482 23,128 18.7%
    Other Operating Income
    Technology Know how fees 57 104 82.1%
    Others 351 1,668 375.1%
    Total 408 1,772 334.2%
    Total Income from Operations 19,891 24,900 25.2%

  • Cipla's domestic business grew by 16.7% YoY for 1QFY14. Therapeutic areas of anti-asthma, antibiotics and cardiovascular contributed to the overall domestic growth. However the company had some challenges due to the strike by stockiest, that impacted the growth to some extent. Cipla has challenged NPPA (National pharmaceutical pricing authority) on the drug pricing, the litigation is still ongoing. Thus the impact of new pricing policy has still not impacted the company. The company expects domestic sales to get impacted by 2-3% (Approx Rs 1.1 bn sales). Thus for the upcoming quarters, company might witness a slowdown in the domestic growth.

  • International business grew by 20.7% YoY during 1QFY14. The export formulations segment witnessed a robust growth of 20.7% for the quarter, in spite of the Escitalopram exclusivity sales in 1QFY13. We believe excluding Escitalopram sales, the base business has witnessed a growth of approximately 55%. The robust growth is largely attributable to better sales growth from Africa on back of new ARV (Anti Retroviral) tenders and double digit growth from Europe and Middle East geographies. The Indore SEZ capacity continues to operate at 50%-60% capacity. It contributed approx Rs 1800 m for the quarter that is 18% of the export sales. The export API segment witnessed a 13.1% decline for the quarter. This was due to one off sales in 1QFY13 which were not present during the current quarter.

  • Operating income witnessed a sharp jump of 339.1% YoY, this is largely due to non-recurring milestone payment received from Meda. However we believe substantial part of the total technology know how fees is contributed by Meda.

  • Operating margins declined marginally by 20 bps to 27.4% during the quarter. This was due to higher contribution from high margin product Escitalopram in 1QFY13, which was not there for the current quarter. The margins were also impacted due to increase in overall operating expenses. Excluding this onetime sales from the product, margins have actually witnessed an improvement, which is also attributable to higher contribution from technology know how fees.

  • Bottomline increased by 18.5% YoY during 1QFY14. The growth was hurt to some extent by the surge in interest costs, and tax expenses during the quarter. Net profits would also have been higher if not for the lower component of forex gains during the quarter. The forex gains (included in other income) were Rs 120 m for the quarter vs Rs 200 in 1QFY13.

    Other updates:

  • Front end presence: With an intention to increase its front end presence, the company is taking various steps. In Europe, Cipla is building up a team to market its products. In the US, it continues to file new ANDAs on its own. In FY13, the company had filed 5 new ANDAs on its own (unlike earlier when it used to do so with partners) and plans to file 10 more such ANDAs in FY14. The company has also received back approx 20 products from its partners. These products are approved from USFDA.

  • Cipla's Medpro acquisition: Medpro revenues will consolidate from 2QFY14 onwards.

  • Update on Respiratory Portfolio: Company is working on 10 inhaler products for various developed and emerging markets. Of these 10 drugs, 5 are launched and 2 are awaiting approval from various regulatory bodies including Europe. Of the 5 products launched so far, contribution of Inhalers to total exports is in double digits, however Europe's contribution is very low. This means large part of Inhalers sales is from emerging markets. Management expects launch of 2 drugs (awaiting approval) in next 1-2 years in the European markets. These products are expected to be big ticket launches.

  • Meda- Meda generated revenues of US$ 6 m from the Dymista sales for the quarter.

    Financial highlights:

  • Company continued to maintain its top line guidance at 13%-14% for FY14

  • As per the management, EBITDA margins are expected to improve on the back of the positive movement in the rupee.

  • Tax rate for FY14 is expected to be at 25%.

  • Capex incurred for 1QFY14 was Rs 1 bn and for FY14, the company has guided for capex of Rs 4 bn. This run rate is expected to remain for upcoming few years

  • Company has hedged its debtors' position amounting to US $ 230 m at Rs 58 per dollar and above.

  • R&D expenses for the quarter were Rs 700 m
What to expect?
At the current price of Rs 412, the stock is trading at a price to earnings multiple of 18 times our estimated FY15 earnings. Going forward, on the domestic front, the company's topline will get impacted due to the pricing policy. On the other hand, SEZ facility will help the company generate better topline growth.

Cipla is eyeing the inhaler opportunities in the international markets and is also aiming for front end operations. Though the company will have better growth on the export front especially from ARV and export segment; however, we believe ramp up in inhaler segment in developed markets will be a major challenge for the company. Other than this, it will also take time for the company to establish front end presence in US market where the competition has already intensified. We thus recommend a HOLD rating on the stock. We shall update our research report with financials for FY16 by the end of August.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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