Cipla: one-offs hit performance in Q3
Cipla Ltd’s sales growth was lower than expected, profitability declined and its pre-tax profit fell by 13% in the December quarter. That appears scary for a company that was doing well till recently. But the drug maker blamed this on a change in its sales distribution policy for India.
Instead of sales bunching up in the last two weeks of the month, they are being spread out. This shift has meant some primary sales (from the company to the distributor) have got deferred. The one-time effect is a temporary loss in sales, but this will come back in the current quarter. The big impact visible in the December quarter numbers will not be repeated, although a smaller effect may remain.
This one-time effect resulted in Cipla’s India sales showing a decline of 0.4%, which would have risen by 11% but for this change. The company said its prescription drugs business has been doing well, although growth of the generics business has been slow in recent times. But it said growth was better in this quarter. In the fiscal year so far, the prescription business grew by 13% while the generics business grew by 9%, adjusting for the policy change.
The company’s exports business did well, with sales rising by 28.5% over a year ago. Sales growth was driven by growth in South Africa and in emerging markets. Sales via the tender route were higher, which the drug maker said affected its gross margin. The outlook for overseas sales growth continues to look good, barring the currency-related volatility that causes havoc on conversion to rupees for reporting purposes.
Operating profit margin declined by 5 percentage points over a year ago. The company said that margins would have been unchanged, if it adjusted for one-offs, including the distribution policy change and depreciation in the South African rand. However, there was also an increase in its research and development expenses, to 8% of sales from 6% of sales. The company expects this to continue.
It also expects the US market to become a key growth driver in the years to come, with a step-up in product filings in this market. Broadly, it maintains a healthy sales growth outlook and is not altering its Ebitda (earnings before interest, tax, depreciation and amortization) guidance, despite the upset in the current quarter.
Cipla’s stock has been under pressure and has declined by 17.6% since early January. These results are not likely to do anything to assuage investor sentiment. Although one-off factors may be responsible, investors may choose to remain sceptical and wait for the next quarter’s results to see if it is back on track.
The writer does not own shares in the above-mentioned companies.