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Cipla: Robust start to FY16 - Views on News from Equitymaster
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Cipla: Robust start to FY16
Aug 24, 2015

Cipla has announced its 1QFY16 results. The company has reported a 42.7% YoY and 120.9% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grew by a robust 42.7% YoY. This was helped by supply made to the partner under 180-days exclusivity.
  • Since these supplies generally have healthy margin profile, the operating profits of the company jumped by 91.8% YoY, leading to margin expansion of 7.1%.
  • Subsequently, even bottomline surged by 120.9% YoY.

Financial performance: A snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 26,472 37,768 42.7%
Other operating income  728  760 4.3%
Expenditure 21,782 28,138 29.2%
Operating profit (EBDITA) 5,418 10,390 91.8%
EBDITA margin (%) 19.9% 27.0%  
Other income  404  489 21.1%
Interest (net)  333  514 54.1%
Depreciation 1,254 1,288 2.7%
Minority interest  270    69 -74.5%
Profit before tax 3,965 9,009 127.2%
Tax 1,019 2,503 145.7%
Profit after tax/(loss) 2,946 6,506 120.9%
Net profit margin (%) 10.8% 16.9%  
No. of shares (m)   840.3  
Diluted earnings per share (Rs)   19.1  
Price to earnings ratio (x)*   36.6  
*based on trailing 12 months earnings

What has driven performance in 1QFY16?
  • Cipla's topline (including operating income) grew by 41.6% YoY. The total exports witnessed robust growth while the domestic business grew modestly.

    Consolidated Business Snapshot
    Rs mn) 1QFY15 1QFY16 Change
    Domestic 12,892 13,970 8.4%
    Exports
    Formulations 12,180 21,740 78.5%
    API 1,400 2,058 47.0%
    Total exports 13,580 23,798 75.2%
    Total gross sales 26,472 37,768 42.7%

  • Cipla's domestic business grew by just 8.4% YoY for 1QFY16. The company's growth was below the industry growth for the quarter. However, for the rest of the year, management expects growth to be in the double digits.

  • Export formulations grew by 78.5% YoY. Large part of this growth is attributable to supply of generic Nexium made by the company to its partner under 180-days exclusivity. We expect the upside from this exclusivity to be in the range of US$100-115 m. The company seems to have realized large part of sales from this exclusivity during this quarter. Further, given that this supply has been made during a period characterized by low competition, the margin profile of such drugs is much higher than a normal drug launch. Cipla continues to focus on such blockbuster exclusivity launches going forward too. Other billion dollar market sized drugs like Truvada and Atripla are also in the pipeline. However, the timing of these launches will be dependent on various factors.

  • The Nexium supply has also translated into better margins for the company. This is despite sharp increase in the employee costs (up 30% YoY) and other expenses (up 40% YoY).

  • At the PBT level, profits surged by 127.2% YoY, while at the net level, growth was slightly lower at 121% YoY. This was on account of higher taxes during the quarter (up by 145% YoY).
What to expect?
At the current price of Rs 699, the stock is trading at a price to earnings multiple of 23.2 times our estimated FY18 earnings. On the back of increasing front end presence, with back end business continuing to grow at decent rate, Cipla is expected to witness good growth. The company has healthy portfolio in the respiratory space, which will also be an important growth driver. Cipla is gradually entering various global markets, and has also launched some inhaler based drugs in Europe and emerging markets. In the long term, increasing the market share of these drugs will be an important milestone.

The company has been actively filing for lucrative products across geographies. This is expected to increase its R&D costs too. Other opportunities like Pulmicort Repsules (Market size approx US$ 1 bn annually in the US) can be an important one for the company in the US market too.

Thus, our view is that those investors who have Cipla in their portfolio can continue to Hold on to it.

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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