Higher costs dent Cipla's margins

While revenues beat Bloomberg consensus estimates of Rs 2,437 cr, net profit was way lower than the estimated Rs 367 cr

Though its consolidated revenues were up 22 per cent year-on-year to Rs 2,581 crore for the December 2013 quarter on the back of a strong exports performance, higher costs dented profitability leading to a 16.5 per cent fall in net profit to Rs 284 crore for India’s third largest drug maker, Cipla. Domestic revenues grew 12.6 per cent to Rs 1,044 crore on account of growth in respiratory, anti-infectives and cardiology segments. Export formulations saw a growth of 34 per cent to Rs 1,352 crore, on the back of anti-retroviral, anti-cancer, anti-allergic and anti-biotic segments. The company gets about 59 per cent of its revenues (formulations plus API sales) from outside the country.

While revenues were ahead of Bloomberg consensus estimates of Rs 2,437 crore, net profit was way lower than the estimated Rs 367 crore. The key reason for the shortfall in profits was the dip in margins.

Ebidta margins for the quarter were down 660 basis points to 18 per cent due to exposure to lower margin anti-retroviral segment, higher employee costs and other expenses. While raw material cost to sales went up 130 basis points year-on-year to 39.1 per cent, employee costs were up 46 per cent to Rs 402 crore, and other expenses were up 33 per cent to Rs 711 crore. In addition to this, the company has indicated that only 2.5 months of Cipla Medpro financials was reflected in the quarter last year (versus the complete quarter this year) as well as the revenues from the new Uganda acquisition was also not available last year. To that extent, the performance is not truly comparable.

"Pursuant to acquisition of 14.5 per cent additional stake in Quality Chemical Industries Ltd (QCIL), a pharmaceutical company, incorporated in Uganda (hitherto an Associate) became a subsidiary of the company on November 20, 2013. Accordingly, the above consolidated results for the current period includes the relevant results of QCIL from the date QCIL became subsidiary and therefore the corresponding figures for the previous period are not comparable," said the company in a statement.

The company has made key hirings which include India CEO, global head of quality as well as other senior management personnel in its bid to put its own front-end and ramp up its presence across key markets. In addition to this, the company has also increased its filings with about 1,000 product applications worldwide in the last nine months. This trend is expected to continue for the next few quarters. As a result, R&D expenditure as a percentage of sales, according to the management, is expected to move up from less than 3 per cent earlier to more than 5 per cent going ahead. Analysts believe there will be short term pain on the profitability front given the aggressive plans. Says Ranjit Kapadia of Centrum Broking, “The company which is in an expansion mode has taken several initiatives which will take time to fructify. However, given the higher expenditure on personnel, R&D, quality and manufacturing, its profitability in the near term is likely to be negatively impacted.”

A key trigger, which is the launch of inhalers in key European markets, is also likely to come about only next year (2015). Thus, in the absence of any near-term triggers and weak December quarter show, the stock which is expected to fall in trade on Thursday as the results were announced post market hours on Wednesday.  

(With inputs from Reghu Balakrishnan)