Cipla's consistent margin gains stand out

Sales growth, benefits from operating leverage led to an in-line performance

In an environment which has been challenging, Cipla’s performance in the quarter ended September (Q2) was decent.

Despite challenges on goods and service tax (GST)-led inventory adjustments in the domestic business, India sales grew 12 per cent over a year and 30 per cent sequentially. On a like-to-like basis, adjusted for the impact of GST, domestic sales (40 per cent of overall) grew 19 per cent over a year. Key therapeutic areas such as cardiology, urology, neurology and respiratory, grew ahead of market’s and momentum gain in the diabetes franchisee provides confidence on growth.

Africa, second largest market for Cipla and 25 per cent of its revenue, has been a steady contributor, and reported its best-ever 10 per cent over a year growth in constant–currency terms, the company said. This was supported by Europe, emerging markets and even active pharma ingredient (API) sales, which recorded double-digit growth.

Though US sales remain a soft spot for all domestic pharma majors, looking at the pricing pressures, the decline in Cipla’s sales in North America by seven per cent over a year and four per cent sequentially are not major worries. A late entrant compared to top peers, the company is gradually ramping up US sales. Given the increasing number of fresh filings and launches, Cipla seems better placed. Having filed five Abbreviated New Drug Applications (ANDAs) in Q2, the company is on target to file 20-25 in FY18. Of the total filings, 98 are pending for approvals.

Overall, consolidated revenue of Rs 3,988 crore, up nine per cent over a year, came near the consensus estimate of Rs 4,014 crore. The highlight remains the operating performance, steadily improving and much better than expectation. Earnings before interest, tax, depreciation and amortisation at Rs 804 crore, up 18 per cent over a year, was better than the Bloomberg consensus estimate of Rs 756 crore.

After having seen lumpiness in margins in the past, Cipla has been working on rationalising costs and improving profitability. With improvement in margins during past five quarters (to 18 per cent), the Q2 number was better at 19.7 per cent. This should ease concerns. Ranjit Kapadia at Centrum Broking says margins in the current challenging environment are good and Cipla has been steadily improving its profitability and growth profile.

Net profit was Rs 423 crore, up 19 per cent over a year and in line with the consensus estimate. Not surprisingly, the Cipla’s share price scaled to its two-year high of Rs 663 on Tuesday.

But, thanks to the negative sentiment on the pharma sector, with regulatory concerns rising for Lupin, coupled with equity markets falling on higher crude oil prices, the stock closed at Rs 608.35, down 7.20 per cent.