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Cipla: Employee costs shoot up - Views on News from Equitymaster

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Cipla: Employee costs shoot up
Aug 20, 2014

Cipla has announced its 1QFY15 results. The company has reported 13.6% YoY growth in sales and a decline of 39.3% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 13.6% YoY during the quarter led by growth in its domestic and export formulations.
  • Operating margins fall sharply by 7.6% during the quarter due to increase in the employee costs and decline in other operating income. The operating profits are down by 21.4% YoY.
  • Led by the poor performance at the operating level and higher depreciation charges, bottomline plummets 39.3%YoY.

Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 23,312 26,472 13.6%
Other operating income 1,802 728 -59.6%
Expenditure 18,218 21,782 19.6%
Operating profit (EBDITA) 6,897 5,418 -21.4%
EBDITA margin (%) 27.5% 19.9%  
Other income 687 404 -41.2%
Interest (net) 396 333 -15.8%
Depreciation 850 1,254 47.5%
Profit before tax 6,337 4,235 -33.2%
Tax 1,536 1,019 -33.7%
Minority Interest (52) 270  
Profit after tax/(loss) 4,854 2,946 -39.3%
Net profit margin (%) 19.3% 10.8%  
No. of shares (m)   840.3  
Diluted earnings per share (Rs)   14.0  
Price to earnings ratio (x)*   33.6  
* On trailing twelve months basis

What has driven performance in 1QFY15?
  • Cipla's topline (including operating income) grew by 8.3% YoY during the quarter led by growth in the international and domestic formulations segment.

    Consolidated Business
    (Rs mn) 1QFY14 1QFY15 Change
    Domestic 11,021 12,891 17.0%
    Exports
    Formulations 10,811 12,181 12.7%
    API 1,480 1,400 -5.4%
    Total exports 12,291 13,581 10.5%
    Total sales 23,312 26,472 13.6%

  • Cipla's domestic business grew by 17% YoY for 1QFY15. The growth in domestic sales was largely on account of growth in respiratory, anti-infective and cardiac therapies.

  • International business grew by 10.5% YoY during 1QFY15, led by growth in export formulations. During the quarter, the company won 30% share in Artemisinin- combination therapies (ACT). Company also launched two drugs in the respiratory segment in the European markets. The market size of these drugs is in the range of US$ 15-20 m. Over and above, the company also won some tenders in Africa in CNS, CVS and Women's health segment.

  • Operating income declined by 21.4% YoY. This was largely attributable to the non-recurring one time milestone payment received from Meda of Rs 1.5 bn in 1QFY14. Over and above, the company's employee costs zoomed by 46% YoY on the back of hiring of senior staff as the company is changing its strategy towards a front end presence. Excluding the one-time income from Meda, EBITDA margins were down by 2.2%. The margins are expected to remain at these levels for the upcoming period.

  • Led by the poor performance at the operating level and higher depreciation charges, bottomline plummeted 39.3%YoY. Even after excluding income from MEDA, the profits were down by 12.2% YoY.
What to expect?
At the current price of Rs 469, the stock is trading at a price to earnings multiple of 18 times our estimated FY16 earnings. On the domestic front, the company's revenues might get impacted as more and more drugs come under the pricing policy.

Cipla is eyeing inhaler opportunities in the international markets and is also aiming for front end operations. The company is expected to see better growth in exports especially from ARVs. We believe ramp up in inhaler segment in developed markets will be a major challenge for the company. Other than this, it will take time for the company to establish front end presence in the US market where already the competition has intensified. Over and above, the increase in costs is expected to impact the margins as seen in this quarter. We thus recommend investors to HOLD on to the stock.

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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