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Cipla: Domestic business disappoints - Views on News from Equitymaster

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Cipla: Domestic business disappoints

Aug 13, 2010

Cipla has announced its 1QFY11 results. The company has reported 8% YoY and 6.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 8% YoY in FY10 led by the export formulation businesses.
  • EBDITA margins contract by 1.2% due to higher raw material and staff costs (as percentage of sales).
  • Bottomline growth at 6.5% YoY during the quarter is higher than the growth in operating profits due to higher other income and lower interest costs.

Financial performance: A snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 13,740 14,798 7.7%
Expenditure 10,324 11,292 9.4%
Operating profit (EBIDTA) 3,415 3,506 2.7%
Operating profit margin (%) 24.9% 23.7%  
Other income 120 168 39.9%
Interest 105 1 -98.9%
Depreciation 458 548 19.7%
Profit before tax 2,972 3,124 5.1%
Tax 555 550 -0.9%
Profit after tax/ (loss) 2,417 2,574 6.5%
Net profit margin (%) 17.6% 17.4%  
No. of shares (m) 777.3 802.9  
Diluted earnings per share (Rs)*   12.5  
P/E ratio (x)**   25.3  
* excluding extraordinary item
** on a trailing 12 months basis

What has driven performance in 1QFY11?
  • Cipla clocked a subdued 8% YoY topline growth during 1QFY11. The sales growth of the domestic business was poor at 4% YoY. The lower growth in domestic sales was primarily due to sale of the ‘i-pill’ business to Piramal Healthcare and lower sales of certain products in the domestic generic business. However, growth in branded generics for the quarter stood at around 11% YoY. However, exports performance was better with sales growing by a 11% YoY. This was led by exports formulations, which grew by 14% YoY. Exports API growth was flat.

    Business snapshot
    (Rs m) 1QFY10 1QFY11 Change
    Domestic 6,519 6,752 3.6%
    - Formulations 5,472 6,257 14.4%
    - APIs 1,404 1,402 -0.2%
    Total exports 6,876 7,659 11.4%
    Total sales 13,395 14,410 7.6%
    Other operating income      
    - Technology knowhow/fees 257 159 -38.1%
    - Others 230 365 58.5%
    Total 487 524 7.6%
    Total income from operations 13,882 14,934 7.6%

  • Operating margins contracted by 1.2% to 23.7% largely due to a rise in raw material and staff costs (as percentage of sales). Raw material costs increased from 44.2% in 1QFY10 to 45.3% in 1QFY11 largely due to a change in product mix. Staff costs (as percentage of sales) were higher by 2.4% on account of annual increments, increase in manpower (particularly at the Indore SEZ) and regrouping of contractual staff at its Goa facilities.

  • The bottomline growth at 6.5% YoY was higher than the 3% YoY growth in operating profits. This was due to higher other income, reduction in interest costs and lower tax expenses. Interest costs reduced during the quarter due to repayment of short-term working capital loans availed by the company. Depreciation charges, however, increased on account of additions to fixed assets mainly on account of commissioning of the Indore SEZ factory.

What to expect?
At the current price of Rs 315, the stock is trading at a price to earnings multiple of 15.5 times our estimated FY13 earnings (ResearchPro subscribers can view latest updates here). We believe that Cipla's focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential especially in FY12 when the number of drugs going off patent is considerable. 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.

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