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Cipla: Meek performance - Views on News from Equitymaster
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Cipla: Meek performance
Nov 14, 2013

Cipla has announced its 2QFY14 results. The company has reported 14% YoY growth in sales and a decline of 26.6% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 14% YoY during the quarter led by growth in domestic and export formulations. Some part of growth is also driven by the Medpro acquisition. This is the first quarter when the company has incorporated the financials of the acquired entity.
  • Operating margins decline by 9.2% to 22.5% during the quarter. This is largely attributable to contribution from the high margin product Escitalopram in 2QFY13, which is not there for the current quarter. Higher contribution from low margin ARVs also impacted margins.
  • Bottomline declines by 26.6% YoY during 2QFY14, on the back of poor performance at the operating level.


Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 21,671 24,632 13.7% 40,993 47,709 16.4%
Other operating income 487 492 1.0% 906 2,292 152.9%
Expenditure 15,143 19,482 28.7% 29,385 37,435 27.4%
Operating profit (EBDITA) 7,014 5,642 -19.6% 12,515 12,566 0.4%
EBDITA margin (%) 31.7% 22.5%   29.9% 25.1%  
Other income 646 756 17.1% 1,147 1,428 24.5%
Interest (net) 45 450 897.1% 73 857 1079.9%
Depreciation 808 914 13.1% 1,605 1,764 9.9%
Exceptional item - -   397 -  
Profit before tax 6,807 5,034 -26.0% 12,381 11,372 -8.1%
Tax 1,945 1,358 -30.2% 3,146 2,894 -8.0%
Minority Int and Share from asso (18) 96   (44) 43  
Profit after tax/(loss) 4,879 3,581 -26.6% 9,280 8,435 -9.1%
Net profit margin (%) 22.0% 14.3%   22.1% 16.9%  
No. of shares (m)         840.3  
Diluted earnings per share (Rs)         18.1  
Price to earnings ratio (x)*         22.4  
*based on trailing 12 months earnings

What has driven performance in 2QFY14?
  • Cipla's topline grew by 14% YoY during the quarter led by growth in both the international and domestic formulations segments and operating income.

    Consolidated Business Snapshot
    (Rs mn) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Domestic 9,320 10,400 11.6% 18,745 21,384 14.1%
    Exports 12,350 14,230 15.2% 22,248 26,324 18.3%
    Total Sales 21,670 24,630 13.7% 40,993 47,708 16.4%
     
    Other Operating Income
    Technology Know how fees 46 161 246.3% 104 265 154.6%
    Others 441 331 -24.8% 802 2,028 152.7%
    Total 487 492 1.0% 906 2,292 152.9%
     
    Total Income from Operations 22,157 25,122 13.4% 41,899 50,000 19.3%

  • Cipla's domestic business grew by 11.6% YoY for 2QFY14. The growth in the domestic revenues was largely attributable to better growth in anti-asthama, urology and COPD (Chronic obstructive pulmonary disease) therapy segments. Over and above, the company continued to get impacted by the disruptions in the trade channels and the new pricing policy.

  • International business grew by 15.2% YoY during 2QFY14. The export formulations segment witnessed growth of 14.9% YoY for the quarter. This was largely attributable to Escitalopram exclusivity sales in 2QFY13, which were not there during this quarter. However, this segment also included sales from Cipla-Medpro, for 2.5 months of US$ 50 m. Company had acquired this company some time back. The export API segment witnessed good growth of 17.7% YoY for the quarter.

  • Operating margins declined by 9.2% to 22.5% during the quarter. This was largely attributable to contribution from the high margin product Escitalopram in 2QFY13, which was not there in the current quarter. Even the contribution from low margin ARVs was higher, which too impacted the margins. Adjusting forEscitalopram one-offs, the margins were still down by 100-200 bps. The consolidation of Cipla-Medpro business too had impacted margins negatively. As per the management, the Cipla-Medpro margins are around 18-19%. Going forward, Cipla expects margins to hover around 22-22.5%% for next few quarters. This is largely attributable to increase in the overall expenses. The company is transforming towards a front end business model and hence is hiring people at higher level. Over and above, the company is also spending more on R&D expenses to build a robust pipeline.

  • Bottomline declined by 26.6% YoY during 2QFY14, on the back of poor performance at the operating level. Overall, the company's interest costs had also gone up, this too had impacted the bottomline.

    Other updates:

  • Front end presence: With an intention to increase its front end presence, the company is taking various steps. In Europe, Cipla is building up a team to market its products. In the US, it continues to file new ANDAs on its own. Cipla has 77 approved products in the US (under partnership). Approximately 30 new products are pending for approval, which includes some filed for its partners.

  • Cipla's Medpro acquisition: During the quarter, the company consolidated Cipla Medpro's revenues. As per the management, the company expects this acquisition to become margin accretive in the next fiscal.

  • Update on Respiratory portfolio: Cipla continues to work on 10 respiratory inhalers. This includes some combination drugs also.

  • R&D expenses: Cipla has incurred Rs 900 m for the quarter, i.e. approx 3.5-4% of total sales and will continue to invest around the same percentage for R&D.

  • Hedge policy: Cipla has hedged US$ 240 m@ Rs 61 on its outstanding debtors.
What to expect?
At the current price of Rs 405, the stock is trading at a price to earnings multiple of 15 times our estimated FY16 earnings On the domestic front, the company's topline will get impacted due to the pricing policy. Even increasing competition might negatively impact sales. SEZ facility will help the company generate better topline growth for its export formulations.

The company is intending to transform its business, to a front end model in various geographies. This could put some pressure on the margins in the medium term. Over and above, Cipla is eyeing inhaler opportunities in the international markets and is also aiming for front end operations.

In our view, while the company might be successful in establishing itself as a front end player, we believe ramp up in the inhaler segment in the developed markets will be a major challenge for the company. Thus, overall, we recommend that investors HOLD on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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