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Cipla: Exports up, forex loss mounts - Views on News from Equitymaster

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Cipla: Exports up, forex loss mounts
Oct 23, 2008

Performance summary
  • Revenues grow by a robust 23% YoY in 2QFY09 due to strong performances by both the domestic and export businesses.

  • EBDITA margins expand substantially by 2.9% led by a fall in raw material costs (as percentage of sales).

  • Bottomline declines by 21% YoY largely due to forex losses incurred during the quarter (forex gain in 2QFY08). Excluding the impact of the same during both the periods, bottomline registers a superlative 50% YoY growth duly aided by a lower tax outgo.



Financial performance: A snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 10,984 13,547 23.3% 20,002 25,618 28.1%
Expenditure 8,744 10,392 18.8% 16,155 19,762 22.3%
Operating profit (EBIDTA) 2,240 3,155 40.8% 3,847 5,856 52.2%
Operating profit margin (%) 20.4% 23.3%   19.2% 22.9%  
Other income 219 169 -22.8% 318 339 6.5%
Interest 24 56 135.9% 32 93 190.0%
Depreciation 328 406 24.0% 630 788 25.1%
Profit before tax 2,108 2,862 35.8% 3,503 5,314 51.7%
Forex loss/(gain) (200) 1,045   (285) 1,792  
Tax 401 303 -24.6% 685 608 -11.3%
Profit after tax/ (loss) 1,906 1,514 -20.6% 3,104 2,915 -6.1%
Net profit margin (%) 17.4% 11.2%   15.5% 11.4%  
No. of shares (m)       777.3 777.3  
Diluted earnings per share (Rs)         8.8  
P/E ratio (x)*         20.8  
* on a trailing 12 months basis

What has driven performance in 2QFY09?
  • Cipla clocked a robust 23% YoY topline growth during 2QFY09, led by strong performances of both its domestic and export businesses. Domestic sales grew by 16% YoY and were driven by the anti-asthmatics, cardiovascular, anti-biotics and anti-retrovirals segments. Export growth of 33% YoY during the quarter was attributed to the formulations businesses growing by a healthy 48% YoY. Depreciation of the rupee against the dollar also played a part in augmenting the growth of exports. However, after the superlative growth in 1QFY09, revenues from the API business failed to impress as the same declined by 13% YoY during 2QFY09.

    Business snapshot
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Domestic 5,094 5,913 16.1% 10,147 11,768 16.0%
    Exports            
    - Formulations 4,059 6,024 48.4% 7,262 10,265 41.3%
    - APIs 1,417 1,240 -12.5% 2,233 3,014 34.9%
    Total exports 5,476 7,264 32.6% 9,496 13,279 39.8%
    Total sales 10,570 13,176 24.7% 19,643 25,046 27.5%
    Other operating income            
    - Technology knowhow/fees 414 429 3.8% 527 585 11.0%
    - Others 191 93 -51.3% 293 301.1 2.6%
    Total 605 522 -13.6% 820 886 8.0%
    Total income from operations 11,175 13,699 22.6% 20,463 25,932 26.7%

  • Operating margins expanded by 2.9% largely due to a substantial fall in raw material costs (as percentage of sales) from 49.9% in 2QFY08 to 46.3% in 2QFY09. This was attributed to improved export realisations as also changes in the product mix. Staff costs (as percentage of sales) increased due to the annual increments and addition of manpower at various units, particularly Sikkim, as well as the field staff.

  • The bottomline declined by 21% YoY largely due to forex losses of Rs 1 bn incurred by the company, as it had made provisions for the same on revaluation of forward contracts and foreign currency loans subsequent to the depreciation of the rupee against the dollar. Excluding the foreign exchange impact during both the quarters, the bottomline jumped 50% YoY due to a lower tax outgo. The effective tax rate for the quarter was lower at 11% (19% in 2QFY08) due to tax incentives availed for EOUs, Baddi and the new plant at Sikkim, which commenced commercial production during 1QFY09.

What to expect?
    At the current price of Rs 183, the stock is trading at a price to earnings multiple of 13.4 times our estimated FY11 earnings. We believe that Cipla’s focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential. 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. Given the attractive valuations currently, we hold a positive view on the stock.

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