Cipla (Q4 FY12)

• Revenues in line with our estimates; up by 12% yoy to Rs18.6bn
• Domestic market growth momentum maintained; clocked in revenue growth of 15.5% yoy to Rs7.5bn
• Export business reported muted growth of 11% yoy
• EBIDTA margin at 21.4% is slightly below our estimation; led by higher other expenses and lower licensing income
• PAT jumped by 45% yoy primarily on account of improved gross margin
• Higher contribution from Indore SEZ to lead growth

Result table

Source: Company, India Infoline Research

Q4 Revenues up by 12% yoy at Rs18.6bn; in line with our expectations

Revenue growth of 12% is primarily led by accelerated domestic market growth. Domestic business clocked in revenue growth of 15.5% yoy. The growth was mainly driven by better performance, on account of growth in anti-asthma, antibiotics, expectorants and anti-inflammatory therapy segments. Exports formulations grew by 15.1% yoy to Rs8.6bn, whereas exports APIs de-grew by 1.0% to Rs2.3bn. The growth in export revenues was primarily led by growth in anti-asthma & anti-malarial segments.

EBIDTA margin at 21.4%; slightly below our estimation

Cipla recorded an OPM of 21.4%, slightly lower than our expectation. But, the yoy improvement in margin by 328bps was notable. The margin expansion was led by higher gross margin and cost rationalization along with better business mix. Material cost has decreased by about 7.2% on a yoy basis mainly on account of rationalization of product mix and markets. Management is confident about maintaining margin at current level for the next year. With the restructuring activity now coming to end, we would expect further margin expansion.

Export business continued to report muted growth; trend to reverse

Export formulation grew by 11% yoy to Rs10.6bn. Inspite of rupee depreciation the growth in export business was way below our expectation. Management indicated the slower growth in this segment is attributable to product rationalization. However, we expect the trend to reverse with higher sales from Indore SEZ and increasing supply of Lexapro generic to Teva (has 180 days exclusivity).

Sales Break-up

Source: Company, India Infoline Research

Cost analysis 

Source: Company, India Infoline Research

PAT increased by 36% yoy; largely led by better gross margin

PAT increased by 16% yoy primarily on account of improved gross margin. Inspite of increase in tax rate the company managed to give strong jump at net level. We expect PAT growth to remain strong with the increasing utilization of its Indore SEZ facility.

Key take-away from the conference call

• Guidance for ~10% overall growth in revenue
• Indore SEZ contributed ~Rs1.9bn to sales. Management expects US FDA approval to flow in next 1 year.
• There was not much benefit on account of Rupee depreciation (+Rs180mn) as Cipla imports 40% of its raw material.
• The current announcement of reducing prices of 3 anti cancer drug will have no impact on margin in short term as it contributes to less than 1% to domestic sales
• In near term, company is going to announce reduction in other few anti-cancer drug prices.
• Organic growth is on track and company is open for inorganic growth
• Out of 11 inhalers filed in UK, company has 4 approvals in hand. Management expects to receive approval of other products in next 1-2 years (including combination inhaler)

We maintain Buy rating with a revised 9-month target price of Rs374

We continue to believe Cipla has largely completed a strong investment phase and expect its meaningful impact in the next 2-3 years. In the past, the stock has been an underperformer in Health care index owing to its lower growth rate compared to the Indian pharmaceutical market and margin pressure. We believe with the operating leverage looming in and improvement in margin and return ratio, Cipla would trade at its higher multiple .Strong balance sheet, consistent earnings performance and improvement in return ratios will lead Cipla into high multiple trading range. We marginally tweak our estimates to factor in lower guidance but, we remain confident about the better performance. We recommend BUY with a revise 9-month target price of Rs374.

Financial summary

Source: Company, India Infoline Research