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Cipla: Living upto expectations

Oct 26, 2004

Performance summary
Domestic pharma major, Cipla, declared its 2QFY05 and 1HFY05 results. The topline grew by 29% in the quarter led by a good performance in both formulation exports as well as in the domestic pharma market. The bottomline has grown by 38%, which was basically due to expansion of margins.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales 4,512 5,814 28.8% 8,774 11,108 26.6%
Expenditure 3,617 4,495 24.3% 7,006 8,722 24.5%
Operating profit (EBDITA) 895 1,319 47.4% 1,768 2,386 34.9%
Operating profit margin (%)19.8%22.7% 20.2%21.5% 
Other income 80 74 -7.6% 147 193 31.3%
Interest 19 40 110.1% 29 53 85.4%
Depreciation 88 125 42.9% 175 255 45.7%
Profit before tax 869 1,229 41.4% 1,712 2,271 32.7%
Tax 174 270 55.2% 345 520 50.7%
Profit after tax/(loss) 695 959 37.9% 1,367 1,751 28.1%
Net profit margin (%)15.4%16.5% 15.6%15.8% 
No. of shares (m) 300.0 300.0   300.0 300.0  
Diluted earnings per share (Rs)* 9.3 12.8   9.1 11.7  
P/E ratio (x)     22.8  
(* annualised)      

What’s the company’s business?
Cipla is the largest pharma company in the retail market according to the latest ORG survey. The company has presence in formulations and bulk drugs manufacturing. All the bulk drug manufacturing facilities of the company have been approved by the US FDA and the formulation facilities have been approved by the Medicine Control Agency - UK, the Medicine Control Council - South Africa, the Therapeutic Goods Administration - Australia and other international agencies. On exports front, the company has strategic alliance with major generic manufactures such as Watson, Mylan, Barr and Ivax for supply of bulk drugs. It has a very wide product range in domestic market, which includes antibiotics, anti-bacterial, anti-asthmatics, anti-inflammatory, antiretroviral, anthelminites, anti-cancer and cardiovascular. In domestic formulation market, antibiotics are the mainstays. It also concentrates on developing specialty bulk drugs for export markets.

Business snapshot
 2QFY042QFY05% change
Domestic 2,908 3,633 24.9%
Formulations 896 1,579 76.3%
APIs 940 838 -10.9%
Total exports 1,836 2,417 31.6%
Total sales 4,745 6,050 27.5%
Other operating income   
Technology knowhow/fees 25 97 285.7%
Others 69 64 -6.4%
Total 94 162 71.9%
Total income from operations 4,839 6,212 28.4%

What has driven performance in 1QFY05?
Outperforms the domestic market:  Sales in the domestic market grew by 25%, thus beating the domestic market growth of 7.5% by quite a margin. Export of formulations has increased by 76%, led by higher contribution from the European and some non-regulated markets. However, supply of API's has shown decline of 10% in 2QFY05 basically due to lower API supply to the regulated markets. Exports now contribute 39% to the company’s revenues (36% in the same quarter last year).

Operating margin expands:  Good growth in the topline helped the company to expand margins. The benefits from economies of scale were visible with lower raw material cost and lower staff cost as a percentage of sales. Also, better product and marketing mix, helped company to expand its margin by 290 basis points.

Cost break-up
Raw Material 2,331 2,938 26.0%
(as % of sales)51.7%50.5% 
Staff Cost 220 262 19.4%
(as % of sales)4.9%4.5% 
Other Expenditure 1,067 1,295 21.4%
(as % of sales)23.6%22.3% 
Total 3,617 4,495 24.3%

Higher depreciation charges subdues net margin:  The profit growth would have been higher but for higher depreciation charges (owing to newly established facilities) and lower export benefits (due to withdrawal of exports benefits), which increased the tax outgo by 55%. However, the other income component has come down, as the company has invested in expanding capacity from the surplus cash reserves.

What to expect?
At Rs 266, the stock is trading at a price to earnings multiple of 22.8 times annualised 1HFY05 earnings. Cipla, being a dominant player in the Indian pharmaceutical industry, is likely to gain from better domestic market opportunities. Apart from this, exports will give the extra kicker to growth, once it API exports to the company's generics partners in the US increases. Being one of the most efficient producers of bulk drugs, Cipla is likely to maintain margins in the international markets, where it has adopted a low risk strategy of supplying bulk drugs to generic companies like Ivax and Watson. Overall, the results are in line with our full year estimates.

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