Cipla (Q4 FY13)

India Infoline News Service | Mumbai |

We believe with changing business model which is visible from of Medpro acquisition, growth is inevitable. We maintain our BUY rating with a target price to Rs463.

CMP Rs400, Target Rs463, Upside15.7%

  • Overall weak Q4 FY13 results; revenue grew by 5.4% yoy to Rs19.7bn
  • Domestic market grew unexpectedly lower at 5.2% yoy; Branded business grew at 11% but poor performance at generic generic front led the growth down
  • Export business reported very low numbers; grew by just over 4% yoy to Rs11bn
  • Operating margin down 56 bps yoy 300 bps qoq led by lower gross margins and  higher employee expenses
  • Poor performance at top-line coupled with higher taxes resulted in lower PAT; PAT de-grew by 8.3% yoy to Rs2.7bn
  • Managements guided for healthy double digit growth for FY14
  • Overall weak performance in Q4FY13 but we expect double digit growth for FY14. We believe with changing business model which is visible from of Medpro acquisition, growth is inevitable. We maintain our BUY rating with a target price to Rs463.
Result table
(Rs mn) Q4 FY13 Q4 FY12 % yoy Q3 FY13 % qoq
Net sales 19,667 18,656 5.4 20,705 (5.0)
(Inc)/dec in stock (495) 319 (255.1) (2,202) (77.5)
Consumption of Materials (7,004) (6,232) 12.4 (7,400) (5.4)
Purchase of Traded Goods (935) (1,174) (20.4) (2,778) (66.4)
Employees' Cost (2,551) (1,820) 40.1 (2,586) (1.4)
Other Expenditure (5,578) (5,123) 8.9 (5,214) 7.0
Operating profit 4,095 3,988 2.7 4,929 (16.9)
OPM (%) 20.8 21.4 (56) bps 23.8 (299) bps
Depreciation (783) (705) 11.1 (780) 0.3
Net Interest income (176) (23) 683.6 (93) 89.6
Other income 585 390 50.1 535 9.3
PBT 3,720 3,650 1.9 4,591 (19.0)
Tax (1,045) (733) 42.5 (1,203) (13.2)
Effective tax rate (%) 28.1 20.1 800 bps 26.2 188 bps
PAT 2,676 2,917 (8.3) 3,388 (21.0)
PAT margin (%) 13.6 15.6 (203) bps 16.4 (276) bps
Ann. EPS (Rs) 13.3 14.5 (8.3) 16.9 (21.0)
Source: Company, India Infoline Research

Overall weak Q4 FY13 results; Revenue grew by 5.4% yoy to Rs19.7bn; far below our estimate of Rs21bn
The company’s Revenue grew by 5.4% yoy to Rs19.7bn, which was far below our estimate of Rs21bn. Overall Domestic market grew unexpectedly lower at 5.2% yoy. Though Branded business grew at 11% but poor performance at generic generic front led the growth down in this segment. The new DPCO policy added pressure on generic generic business. Even Export business reported very low numbers, grew by just over 4% yoy to Rs11bn. Export business of API of this quarter has shifted to next quarter which resulted in decline in API at 24% yoy to Rs17.7bn

Overall weak performance in Q4FY13 but we expect double digit growth for FY14
We believe Cipla has largely completed a strong investment phase and expect its meaningful impact in the next 2-3 years. With changing Business model which is visible from of Medpro acquisition, growth is inevitable. Cipla Medpro has won a government tender of ~ US$162mn to be supplied till 2014, which will aid Cipla to report robust revenue growth. Dymita would be launched in Europe in this year through partner. Additionally Indore SEZ (now has USFDA approval) along with the improvement in Dymista supply would boost the export growth.

Operating margin down 56 bps yoy 300 bps qoq led by lower gross margins and higher employee expenses
Cipla recorded an OPM of 20.8%, was lower than our expectation of 22%. Operating margin down 56 bps yoy 300 bps qoq led by lower gross margins and higher employee expenses. We expect improvement in margin with Dymista scaling up. Dymista has also received EU approval and company plans to launch in the region over next in next quarter.  Poor performance at top-line and higher taxes resulted in lower PAT. PAT de-grew by 8.3% yoy to Rs2.7bn, majorly led by higher tax expenses at 28% vs 20% last year in same quarter.

Revenue Break-up
Rsmn.  Q4FY13 Q4FY12 % yoy Q3FY13 % qoq
Domestic 7,931 7,536 5.2 9,562 (17.1)
Total Exports 11,282 10,850 4.0 11,067 1.9
Formulations 9,536 8,551 11.5 9,692 (1.6)
APIs & others 1,747 2,299 (24.0) 1,375 27.0
Other operating income 605 515 17.4 398 52.0
Technical knowhow/fees 387 56 591.6 168 130.4
Others 218 459 (52.6) 230 (5.4)
Total 19,818 18,901 4.9 21,027 (5.8)

Cost Analysis
As a % of net sales Q4FY13 Q4FY12 bps yoy Q3FY13 bps qoq
Raw material 33.1 35.1 (201) 25.1 799
Purchases 4.8 6.3 (154) 13.4 (866)
Personnel Costs 13.0 9.8 321 12.5 48
Other Expenditure 28.4 27.5 90 25.2 318
Total costs 79.2 78.6 56 76.2 299

Outlook & Valuation
We maintain Buy rating with a revised 9-month target price of Rs463
We believe Cipla has largely completed a strong investment phase and expect its meaningful impact in the next 2-3 years.  With changing Business model which is visible from of Medpro acquisition, growth is inevitable. We slightly modify our earnings estimates and maintain BUY rating with a target price to Rs463.

Key take-away from the conference call
Guidance for higher double digit growth in FY14 which does not include the contribution from Medpro integration
Medpro take-over would get finalised in next two quarter
Organic growth is on track and company is open for inorganic growth
Company gained Rs180mn on account foreign exchange which is included in the other income
R&D expenses are currently at ~4.5% of sales which will go up by 100bps to ~ 5.5%
Forward contracts worth US$210mn are outstanding as on March 31,2013 which covers the debtors outstanding
Indore SEZ contributed ~Rs1950mn in Q4 FY13.
Company expects to incur capex of ~Rs5.5bn for and  guidance TAX rate of 25% for next two years
Financial Summary
 

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