Cipla Ltd’s performance in fiscal 2011 (FY11) was severely tested by the launch of a large special economic zone (SEZ) facility in Indore. After the plant was ready, the company had to go around taking regulatory approvals.
The time taken for these approvals meant that the plant operated at sub-optimal capacities; during the March quarter, it contributed just Rs 60 crore to revenue, but costs were higher at Rs 90 crore.
Also see | Cost Pains(PDF)
This plant now has approvals to sell drugs in most large markets, except the US (where it is pending). The company expects the Indore plant to contribute about 10% to sales in FY12, which should see it recover its overheads more comfortably.
The company conservatively expects revenue to grow about 10-12%, which would put this plant’s contribution at about Rs 670 crore at the lower end of the growth estimate. As a result, both sales growth and margins should improve, though the trend may be more noticeable in the second half, as utilization ramps up.
The March quarter also saw Cipla’s sales rise 23% from a year earlier, compared with a slower 8% gain in the December quarter. Its domestic market sales growth was higher at 15% compared with 11% in the previous quarter.
Cipla expects this to continue, as it joins other large pharmaceutical companies in their effort to derive higher growth from their home market. In the past, companies were more focused on growing in international markets.
In fact, Cipla’s sales in the overseas markets outstripped that in the domestic market, up by about 28%, with formulation exports rising by 21% and sales of active pharmaceutical ingredients (APIs, the inputs used to make formulations) rising by 58%.
But a higher proportion of anti-AIDS drugs in the formulation basket and API sales meant that it sold more of relatively lower-margin products. Thus, the company’s operating profit margin fell by about 70 basis points from a year ago. One basis point is one-hundredth of a percentage point.
Lower other income during the quarter and a one-time income from the sale of a drug in the year-ago quarter led to a 22% decline in Cipla’s net profit. But profit before tax and exceptional items is more representative, and was virtually flat.
The current year should be a better year for the company. Contribution from its Indore SEZ will improve, and sales of its inhaler exports business is also expected to grow. Its share is quoting at about 25 times its FY11 earnings per share, which makes it fairly valued. If its actual sales growth during FY12 betters expectations, it could be a positive trigger for the stock.
Graphic by Sandeep Bhatnagar/Mint
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