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Cipla: Forex gains bolster profits - Views on News from Equitymaster

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Cipla: Forex gains bolster profits
Oct 30, 2009

Performance summary
  • Revenues grow by 7% YoY in 2QFY10 led by the domestic formulation and API export businesses.
  • EBDITA margins expand by 2.6% due to lower raw material costs and other expenditure (as percentage of sales).
  • Bottomline reports a splendid 82% YoY growth largely bolstered by forex gains this quarter as against a loss in 2QFY09. Excluding this, net profits grow by a mere 5% YoY.


Financial performance: A snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 13,529 14,429 6.7% 25,566 28,168 10.2%
Expenditure 10,373 10,695 3.1% 19,707 20,750 5.3%
Operating profit (EBIDTA) 3,155 3,733 18.3% 5,859 7,419 26.6%
Operating profit margin (%) 23.3% 25.9%   22.9% 26.3%  
Other income 169 128 -24.0% 339 248 -26.9%
Interest 56 84 49.6% 93 188 103.6%
Depreciation 406 478 17.7% 788 936 18.7%
Profit before tax 2,862 3,300 15.3% 5,317 6,542 23.0%
Tax 303 618 104.1% 608 1,173 93.0%
Forex loss/ (gain) 1,045 (75)   1,795 195 -89.1%
Profit after tax/ (loss) 1,514 2,757 82.1% 2,915 5,175 77.5%
Net profit margin (%) 11.2% 19.1%   11.4% 18.4%  
No. of shares (m)       777.3 802.9  
Diluted earnings per share (Rs)*         11.3  
P/E ratio (x)         26.9  
* excluding forex losses

What has driven performance in 2QFY10?
  • Cipla clocked a subdued 7% YoY topline growth during 2QFY10. While the domestic business grew by a lukewarm 7% on account of seasonal variations, the subdued 4% YoY growth in its export formulations business was largely led by the 38% YoY growth in API exports. Export formulations declined by 3% YoY, which was primarily attributed to the high base in the corresponding quarter last year as well as a delay in the availability of certain key raw materials.

    Business snapshot
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Domestic 5,913 6,314 6.8% 11,768 12,833 9.1%
    Exports            
    - Formulations 6,023 5,819 -3.4% 10,265 11,291 10.0%
    - APIs 1,240 1,706 37.5% 3,013 3,110 3.2%
    Total exports 7,264 7,525 3.6% 13,278 14,401 8.5%
    Total sales 13,176 13,839 5.0% 25,046 27,234 8.7%
    Other operating income            
    - Technology knowhow/fees 429 508 18.3% 585 765 30.8%
    - Others 75 209 180.2% 249 439.0 76.1%
    Total 504 717 42.3% 834 1,204 44.3%
    Total income from operations 13,680 14,556 6.4% 25,880 28,438 9.9%

  • Operating margins expanded by 2.6% to 25.9% largely due to a fall in raw material costs and other expenditure (as percentage of sales). Raw material costs were lower on account of changes in the product mix including lower contribution of the anti-retroviral segment thereby resulting in better operating margins. Staff costs were higher on account of increase in operations.

  • The bottomline grew by 82% YoY and was bolstered by the forex gain of Rs 75 m this quarter as against a loss of Rs 1 bn in 2QFY09. Thus on excluding the same, the growth in net profits was tepid at 5% YoY. This lower growth despite the 18% YoY growth in operating profits was largely due to higher interest costs and reduction in other income. Interest costs increased during the quarter due to short term working capital loans and fixed deposits availed by the company. Depreciation also increased due to the addition of fixed assets.

What to expect?
At the current price of Rs 303, the stock is trading at a price to earnings multiple of 17 times our estimated FY12 earnings. We believe that Cipla’s focus on contract manufacturing shall gather momentum in the future keeping in mind the global generics potential especially in FY12 when the number of drugs going off patent is considerable. 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. Overall, we maintain our positive view on the stock.

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