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Cipla: Margins continue to slide - Views on News from Equitymaster
 
 
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  • Oct 31, 2003

    Cipla: Margins continue to slide

    Cipla has announced its 2QFY04 results. Buoyed by a strong growth in the domestic as well as international markets, the company has reported a 23% growth in the topline. However, a sharp increase in material and staff cost has put pressure on its operating margins, thus resulting in a 6% drop in the bottomline. For 1HFY04, Cipla has reported an 18% growth in net profits and a marginal 2% growth in bottomline.

    Results at a glance...
    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Net Sales 3,943 4,839 22.7% 7,973 9,381 17.7%
    Other Income 41 80 96.3% 89 147 65.8%
    Expenditure 2,962 3,943 33.1% 6,169 7,612 23.4%
    Operating Profit (EBDIT) 981 895 -8.8% 1,804 1,769 -2.0%
    Operating Profit Margin (%) 24.9% 18.5%   22.6% 18.9%  
    Interest 2 19 1005.9% 4 29 617.5%
    Depreciation 68 88 29.6% 138 175 27.3%
    Profit before Tax 953 869 -8.8% 1751 1712 -2.2%
    Tax 217 174 -19.6% 408 345 -15.5%
    Profit after Tax/(Loss) 737 695 -5.6% 1343 1367 1.8%
    Net profit margin (%) 18.7% 14.4%   16.8% 14.6%  
    No. of Shares (m) 60.0 60.0   60.0 60.0  
    Earnings per share (Rs)* 49.1 46.4   44.8 45.6  
    P/E (x)   28.0     28.4  
    (*Annualised)            

    Cipla’s topline growth was fuelled by a strong growth in both domestic and export markets. In the domestic market, Cipla has outperformed the market with a 12% growth on the back of impressive performance in the anti-asthmatics and anti-hypertensives segment. On the exports front, while formulations sales grew by 18%, revenues from the bulk drugs business grew by a sharp 73%. Anti-AIDS and anti-ulcerant segments were the key contributors to the growth in export sales. A sharp rise in other operating income (higher export benefits) further contributed to the revenue growth.

    Revenue break-up
    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Domestic 2,593 2,908 12.2% 5,217 5,962 14.3%
    Exports:
    Formulations 762 896 17.5% 1,269 1,780 40.2%
    Bulk drugs 544 940 72.8% 1,426 1,502 5.3%
    Other operating income 44 94 113.2% 60 136 126.3%
    Total 3,943 4,839 22.7% 7,972 9,381 17.7%

    Although increase in bulk drug exports is a positive for the company, being a comparatively low margin business, it has put pressure on operating margins of the company. Resultantly, Cipla’s material costs have seen a sharp 29% rise (48% of sales in 2QFY04 as compared to 46% in 2QFY03). This apart, a 39% increase in staff cost as well as other expenditure put further pressure on the margins. The staff cost was higher due to certain one-time ex-gratia payments to employees and due to direct appointment of a section of field force, which were earlier outsourced. Though it has impacted operating margins adversely in this quarter, we believe that it will have a positive impact on sales in the long term. Other expenditure was higher due to higher promotional expenditure, rise in maintenance costs inorder to meet international regulatory standards and higher recurring costs on overheads such as manufacturing, power & fuel and stores & spares.

    Although other income almost doubled due to higher foreign exchange gains made by the company, lower operating margins and higher interest costs have put pressure on Cipla’s bottomline. The interest cost has increased due to short-term working capital borrowings made by the company.

    Recently, The Supreme Court had passed a verdict against Cipla in respect of inclusion of certain drugs under price control. Resultantly, the National Pharmaceutical Pricing Authority (NPPA) had issued a notice on the company for the recovery of Rs 1 bn for over-pricing in respect of these drugs. Cipla was required to pay 50% of the dues immediately. Although other companies have paid their share of dues, Cipla has declined to pay the same. Going forward, if Cipla is required to pay the dues, it could lower profitability.

    At Rs 1,296, Cipla is trading at a P/E of 28x annualised 1HFY04 earnings. With the domestic market showing signs of recovery, Cipla is in a good position to capitalize on the same. Moreover, the company is also expected to benefit from the recent WTO agreement regarding the supply of anti-AIDS drugs in under developed countries. The approval of Cipla’s CFC-free inhalers is expected to further fuel growth for the company going forward. However, we would like to caution investors that the approval has been delayed and the company has refused to give any time frame within which it expects the product to be approved.

     

     

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