Stock Review: CIPLA

CIPLA'S third-quarter results were below analysts' expectations. Its poor performance in the domestic market, high operating expenses incurred on the Indore SEZ, and the decline in export realisations due to an appreciating rupee dented the company's bottom line. 

   The second-largest player in the domestic market grew 11.3%, significantly lower than the average industry growth of 18-20% for the quarter to December. Intense competition leading to price erosion has impacted the company, which is a leading player in therapeutic areas such as respiratory and anti-AIDS treatment.

   All heads of expenditure, except raw material costs, grew at a much higher rate than its net sales, shrinking operating profit margins by 700 bps to 21% for the quarter. The rise in expenses is because of the commissioning of the Indore SEZ, which is eating up . 25-30 crore as operating cost every quarter. The SEZ is awaiting site approvals from various regulatory agencies across different countries before it can start manufacturing products for the export market.

   The export business, which contributes about half of the company's total revenues, has also grown at a muted pace, thanks to the rupee appreciating by 4% during the December quarter. Milestone payments in the form of technical know-how fees had been high during FY10. However, this income has been on a decline this fiscal on account of more products awaiting commercialisation. The company has five to six inhaler products that are under various stages of approval in the Europe.

   Cipla has reported a drop in profits for the second successive quarter. The pressure on the company's operating earnings due to the commissioning of the Indore SEZ is likely to continue for a few more quarters till the plant is fully commercialised. It is likely to be fully operational only by the end of the next fiscal. It will then contribute 10-12% to the company's total turnover.

   There are no visible growth triggers in the near term for Cipla. The company has to re-think its strategy to grow in the domestic markets as well in the export markets, where it has been following the conservative model of launching products through local partnerships.