Stock Review: CIPLA

Cipla's show for the fourth quarter ended March 2011 has been mixed. The 22% growth in net sales, beat analysts' expectations. However, a similar drop in net earnings – lower than what the Street expected – proved to be a dampener.

Growth in sales has been the strongest in the past nine quarters – primarily driven by a robust growth in exports. Having grown at 28%, export sales contributed 60% to the company's total revenues. However, there are concerns relating to this since 30% of its export sales is contributed by anti-retroviral formulations – the majority of which are sold through low-margin highvolume tender business in Africa. Domestic sales rose 15% - still lagging average industry growth. An exceptional gain of . 95 crore in the fourth quarter of FY10, higher raw material costs along with the high commissioning costs of the SEZ has led to the steepest y-o-y drop in net profit in last 15 quarters. Raw material cost as a percent to sales has increased to 49.5% against 43.2% a year ago due to higher proportion of anti-retrovirals in export formulations. The commissioning costs of Indore SEZ ahead of its full commercialisation continue to take a toll on the company's profit. The SEZ overheads such as staff cost and depreciation have increased the total expenditure for the quarter. The SEZ burdened the bottomline by . 30 crore for the March quarter. Operating profit margin decreased to 18.7% in the March quarter from 19.6% in the fourth quarter last year.

Against the guidance of 8-10% growth in sales, Cipla closed the FY11 with a 14% rise in revenues and a 10% drop in profit due to the negative contribution of the Indore SEZ. With an annual turnover of . 6,123 crore, it has again been conservative in guiding 10-12% of growth in revenues for this fiscal with operating profit margin expected at 20%.

 

Indore SEZ is likely to be fully commercial sometime this fiscal and is expected to contribute around 10% to the total revenues. It is rationalising its strategy for the domestic markets where it is the leading player. It is now focusing on penetrating in the hinterland equipped with a larger field force and entering new therapeutic areas like oncology, neuro-psychiatry etc. A shift in exports from low-margin to high-margin business along with ramp up of its inhaler business will also help beef up earnings .