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Cipla: Poor performance - Views on News from Equitymaster
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Cipla: Poor performance
Nov 20, 2014

Cipla has announced its 2QFY15 results. The company has reported 5.9% YoY growth in sales and a decline of 16.6% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Net sales (including other operating income) grow by 9.2% YoY during the quarter led by growth in its domestic formulations.
  • Operating margins (including other operating income) decline by 2.2% during the quarter due to increase in overall operating expenses.
  • Led by the poor performance at the operating level, reduction in other income and higher depreciation charges, bottomline declines by 16.6% YoY.


Financial performance: A snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 24,840 26,298 5.9% 48,147 52,770 9.6%
Other operating income 492 1,375 179.4% 2,292 2,103 -8.3%
Expenditure 19,663 22,088 12.3% 37,874 43,871 15.8%
Operating profit (EBDITA) 5,669 5,585 -1.5% 12,565 11,002 -12.4%
EBDITA margin (%) 22.4% 20.2%   24.9% 20.1%  
Other income 741 233 -68.5% 1,428 637 -55.4%
Interest (net) 461 468 1.5% 857 802 -6.4%
Depreciation 914 1,220 33.5% 1,765 2,474 40.2%
Exceptional item       - -  
Profit before tax 5,034 4,129 -18.0% 11,371 8,363 -26.5%
Tax 1,358 1,007 -25.8% 2,894 2,026 -30.0%
Minority Int and Share from asso 96 134   43 404  
Profit after tax/(loss) 3,581 2,988 -16.6% 8,434 5,933 -29.7%
Net profit margin (%) 14.1% 10.8%   16.7% 10.8%  
No. of shares (m)         840.3  
Diluted earnings per share (Rs)         14.2  
Price to earnings ratio (x)*         43.2  
*based on trailing 12 months earnings

What has driven performance in 2QFY15?
  • Cipla's topline (including operating income) grew by 9.2% YoY. There was one time operating income from Salix, which has helped overall topline growth. Net sales were up by 5.9%, led by good growth in the Indian business.

    Consolidated Business Snapshot
    (Rs mn) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Domestic 10,390 12,510 20.4% 21,411 25,401 18.6%
    Exports
    Formulations 12,390 12,430 0.3% 23,201 24,611 6.1%
    API 2,060 1,360 -34.0% 3,540 2,760 -22.0%
    Total exports 14,450 13,790 -4.6% 26,741 27,371 2.4%
    Total Sales 24,840 26,300 5.9% 48,152 52,772 9.6%

  • Cipla's domestic business grew by 20.4% YoY for 2QFY15 and was largely on account of growth in Pediatrics, Respiratory, Spectracare and Urology therapies.

  • International business declined during the quarter by 4.6% YoY. As per the management, the main reasons for this fall were the decline in third party API business, less tender business as compared to last year and supply constraints caused by higher captive consumption of APIs.

  • Operating profits declined to 20.2% YoY due to poor top line growth and increase in operating costs.

  • Led by the poor performance at the operating level, reduction in other income and higher depreciation charges, bottomline declined by 16.6% YoY.
What to expect?

At the current price of Rs 612, the stock is trading at a price to earnings multiple of 22.9 times our estimated FY17 earnings. The company is expected to witness good growth in domestic market, owing to leadership in its therapies. However increasing competition cannot be ruled out.

Cipla is eyeing inhaler opportunities in the international markets and is also aiming for front end operations. Thus, the company's overall costs have zoomed up and it will take approx 12-18 months till it is able to align its overall processes. Company seems be advancing well in launching respiratory drugs, however in the long term, good marketing of these drugs will be an important milestone. Overall we reiterate our Hold rating on 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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