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Cipla: Net up 16%; OPM to blame - Views on News from Equitymaster
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  • Oct 20, 2001

    Cipla: Net up 16%; OPM to blame

    Cipla declared its 2QFY02 results today. Sales grew by 25%, more or less in our expectation. However, a 220 basis points fall in operating margins has come as a big disappointment. Markets were infact expecting a spurt in operating margins on the back of significant growth in export revenues.The drop in operating margins seems to be due to higher marketing spend and low margin export business like anti-AIDS drugs to South African markets.

    (Rs m) 2QFY01 2QFY02 Change H1FY01 H1FY02 % Change
    Sales 2,697 3,370 25% 5,115 6,349 24.1%
    Other Income 100 119 19.0% 176 180 2.5%
    Expenditure 2,063 2,653 28.6% 3,992 5,059 26.7%
    Operating Profit (EBDIT) 634 717 13.2% 1,122 1,290 15.0%
    Operating Profit Margin (%) 23.5% 21.3% - 21.9% 20.3% -
    Interest 1 5 - 5 7 35.8%
    Depreciation 45 48 5.6% 83 95 15.2%
    Profit before Tax 687 784 14.0% 1,210 1,368 13.0%
    Other Adjustments - - - - - -
    Tax 170 180 5.9% 305 320 4.9%
    Profit after Tax/(Loss) 517 604 16.7% 905 1,048 15.8%
    Net profit margin (%) 19.2% 17.9% - 17.7% 16.5% -
    No. of Shares (eoy) (m) 60.0 60.0 - 60.0 60.0 -
    Diluted Earnings per share 34.5 40.3 - 30.2 34.9 -
    P/E (at current price) - 29.0 - - 33.1 -

    While exports grew by 77%, driven mainly by US geography, domestic sales grew by around 10%. It . Though insignificant on the net level, interest expenses have also shown a rise adding up to Rs 5 m against Rs 3 m in 1QFY01. Tax provision also showed a spurt inspite of a rise in exports due to new accounting policy on deffered taxation. Finally, net margins dropped 130 basis points reflecting operating margins slide.

    The uncertainty prevailing over the export of generic Omeprazole, which is considered to be key earning opportunity for cipla has further intensified. Just to recall, Cipla has an arrangement to supply Omeprazole (bulk drug) to Andrx. Andrx in turn claims to have a six month marketing exclusivity for the drug. However, the issue is caught in a long legal tangle. Recently, the US FDA had granted two more patents to AAI Pharma which has intensified the ongoing legal battle.

    In a recent development, the company has offered to supply Anthrax drug Ciprofloxacin to the US markets. Ciprofloxacin is currently under patent and hence only the patent holder viz, Bayer AG is allowed to sell the drug. However, the US administration announment to include other anti-biotics for anti-anthrax drive could open an opportunity for Cipla and other Indian companies. Cipla has the US FDA clearance for selling amoxyciline, (a substitute for ciprofloxacin) in the US markets.

    Cipla has also indicated to venture in to biotech opportunities with a strategic foriegn partner. At Rs 1,155 FY02E earnings, the stock trades at 28x our expected earnings for FY02. Due to prevailing uncertainity we have not factored in any earnings from generic Omeprazole and CFC free inhalers.



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