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Cipla: Profits hit by under-utilized SEZ - Views on News from Equitymaster

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Cipla: Profits hit by under-utilized SEZ
Aug 23, 2011

Cipla has announced its results for the first quarter 2011-12. The company has reported 7.5% YoY growth and 1.6% YoY de-growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow just by 7.5% YoY due to slow growth in the domestic as well as export formulation businesses.
  • Operating (EBDITA) margins increase by 0.5% due to lower raw material costs led by change in product mix.
  • Net profits decrease by 1.6% YoY during the year due to the lower other income, higher depreciation and higher tax outgo.


Financial performance: A snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 14,798 15,914 7.5%
Expenditure 11,419 12,219 7.0%
Operating profit (EBIDTA) 3,379 3,695 9.4%
EBDITA margin (%) 22.8% 23.2%  
Other income 295 249 -15.6%
Depreciation 548 703 28.1%
Interest 1 43  
Profit before tax 3,124 3,199 2.4%
Tax 550 666 21.0%
Exceptional Gain / (Loss) - -  
Forex Gain / (Loss) - -  
Minority Interest - -  
Profit after tax/(loss) 2,574 2,533 -1.6%
Net profit margin (%) 17% 16%  
No. of shares (m) 802 802  
Diluted earnings per share (Rs) 3 3  
Price to earnings ratio (x)*   24  
*On trailing 12 month basis

What has driven performance in 1QFY12?
  • Cipla's sales grew only by 7.5% YoY due to the lower growth from the exports business (up 8.4% YoY) and the domestic business (10.1% YoY). In the domestic segment, the acute segment faced competition from industries players while the respiratory segment continued to show momentum. The exports formulation segment that contributes nearly 42% to the company's sales only grew by 5.3% due to lower sales from anti-retrovirals (ARV).
  • Revenue break-up
    (Rs m) 1QFY11 1QFY12 Change
    Domestic 6,752 7,436 10.1%
    Total Exports 7,659 8,302 8.4%
    Exports Formulations 6,257 6,589 5.3%
    Exports API 1,402 1,713 22.2%
    Net Sales 14,410 15,738 9.2%


  • Operating (EBDITA) margins increased by 0.5% (as a percentage of sales) mainly due to lower raw material costs. Raw material costs decreased by 3.3% (as a % of sales) to 42% due to lower sales from anti-retrovirals (ARV). In fact, the margin expansion would have been higher had it not been for the increase in employee costs and other expenditure.


  • Net profits decreased by 1.6% YoY due to de-growth in the other income, higher depreciation charges and interest outgo. Other income decreased by around 15% YoY, while depreciation increased by 25% YoY. With the Indore SEZ facility coming on stream depreciation increased sharply by Rs 150 m.

What to expect?

At the current price of Rs 284, the stock is trading at a price to earnings multiple of 13.7 times our estimated FY14 earnings. We believe that Cipla's focus on contract manufacturing will get further steam and the management has also suggested about new possible partnerships. The company is planning to introduce 25 to 30 products every year in the domestic market and thus leverage its domestic reach. Having said this, Cipla has started facing competition in some of its products. The company is also looking to gain an advantage with the ramp up of exports through the Indore SEZ facility. We maintain a HOLD on the stock at the current price.

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