Cipla: Favourable mix boosts margins

Cipla announced fourth quarter results of financial year 2011-2012 (4QFY12). The company reported a 12% YoY and 36% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary

• Revenues grow by 12% YoY in 4QFY12 led by growth in both the domestic and export formulations businesses.
• EBDITA margins improve by 4% to 21.4% due to a substantial fall in raw material costs (as percentage of sales).
• Strong growth at the operating level percolates down to the bottomline which grows by 36% YoY.

Financial performance: A snapshot

(Rs m)	4QFY11	4QFY12	Change	FY11	FY12	Change
Net sales	16,677	18,656	11.9%	63,311	69,775	10.2%
Expenditure	13,775	14,668	6.5%	50,104	53,956	7.7%
Operating profit (EBIDTA)	2,903	3,988	37.4%	13,207	15,819	19.8%
Operating profit margin (%)	17.4%	21.4%		20.9%	22.7%
Other income	322	390	20.9%	912	1,483	62.6%
Interest	18	23	24.3%	125	266	113.4%
Depreciation	697	705	1.2%	2,480	2,821	13.7%
Profit before tax	2,510	3,650	45.4%	11,514	14,215	23.5%
Tax	370	733	98.1%	1,910	2,975	55.8%
Profit after tax/ (loss)	2,140	2,917	36.3%	9,604	11,240	17.0%
Net profit margin (%)	12.8%	15.6%		15.2%	16.1%
No. of shares (m)				802.9	802.9
Diluted earnings per share (Rs)					14.0
P/E ratio (x)**					22.8

** on a trailing 12 months basis

What has driven performance in 4QFY12?

• Cipla clocked a decent 12% YoY topline growth during 4QFY12. Growth was largely led by the domestic business, which grew by 15.5% YoY. However, exports growth was relatively lower at 11% YoY. This was on account of the poor performance of the API business, which declined by 1% YoY. The exports formulations business did well though to grow by 15% YoY. For both the domestic and the exports formulations businesses, inhalers largely contributed to growth.
  Business snapshot

  (Rs m)	4QFY11	4QFY12	Change	FY11	FY12	Change
  Domestic	6,522	7,536	15.5%	28,224	32,129	13.8%
  Exports
  - Formulations	7,428	8,551	15.1%	26,823	29,677	10.6%
  - APIs	2,322	2,299	-1.0%	6,792	7,244	6.6%
  Total exports	9,750	10,850	11.3%	33,615	36,920	9.8%
  Total sales	16,272	18,385	13.0%	61,839	69,049	11.7%
  Other operating income
  - Technology knowhow/fees	207	56	-73.0%	637	310	-51.3%
  - Others	386	459	18.8%	1,512	1,387.9	-8.2%
  Total	594	515	-13.2%	2,149	1,698	-21.0%
  Total income from operations	16,865	18,900	12.1%	63,987	70,747	10.6%

  
  
• Operating margins improved by 4% to 21.4% largely due to a significant fall in raw material costs (as percentage of sales). It must be noted that during this quarter there was a lower proportion of anti-retrovirals (ARVs), which typically have lower margins. Thus, higher proportion of high margin products and better realisations led to the improvement in overall operating margins. Staff costs (as percentage of sales) increased on account of annual increments and increase in manpower. The rise in other expenditure was attributed to increased marketing expenses, professional fees and travel expenditure.

• Strong growth at the operating level percolated down to the bottomline which grew by an impressive 36% YoY. Having said that, growth was lower than the 45% YoY growth in profit before tax (PBT) on account of significant increase in tax expenses. Tax for the current quarter increased mainly due to expiry of tax benefits on export oriented units (EOUs).

What to expect?

At the current price of Rs 319, the stock is trading at a price to earnings multiple of 16 times our estimated FY14 earnings. We believe that Cipla's focus on contract manufacturing will get further steam and the management has also suggested about new possible partnerships. The company is planning to introduce 25 to 30 products every year in the domestic market and thus leverage its domestic reach. Having said this, Cipla has started facing competition in some of its products. The company is also looking to gain an advantage with the ramp up of exports through the Indore SEZ facility. Further, it has substantial ANDA filings in the US through its partners, which should also provide a fillip to its US business. Overall, we maintain a HOLD on the stock at the current price.