Cipla Ltd’s September quarter earnings were expected to get a boost from the supplies of generic escitalopram (the generic name of Lexapro, an anti-depressant) to Teva Pharmaceutical Industries Ltd. This was visible in the June quarter as well. But what surprised analysts was a sequential improvement in margins, which the company attributed to a better product mix and to higher realizations.
While the margins attributable to escitalopram are expected to decline in course of time, the company expects the margin improvement in its base business to last. Sales growth, too, has been good; and from its earlier sales forecast of 12-15% in 2012-13, it has scaled up to 15%-plus.
Cipla’s sales rose 23.9% year-on-year (y-o-y) to Rs.2,192 crore, with formulation exports growing 38.2%. Domestic sales growth was a bit muted at 13.5%, but the firm said a delayed monsoon affected all players, and it expects growth in the second half to be in the range of 17-18%.
Profitability had risen sharply in the June quarter, when margins rose 6.2 percentage points sequentially. But the September quarter saw it improve further by 3.3 percentage points sequentially to 30.9%. The company said an improved product mix, higher realizations, rupee depreciation, and generic escitalopram were contributors. Margins rose y-o-y despite a sharp increase in employee costs, but other expenses grew at a much slower rate. Of these, the contribution of generic escitalopram will become less as the drug has exited the exclusivity period, and foreign currency movements, too, are unpredictable, but the other two factors are more sustainable. The company has been focusing more on products where it can earn good margins, and has decided to be selective about bidding in tender-based supply contracts.
Its Indore Special Economic Zone’s (SEZ) contribution to sales has been rising, and capacity utilization of its tablet and capsules operations is 70%. The company recently received approval for its facilities from the US Food and Drug Administration, and once it starts supplies, utilization can be expected to improve, and so will the contribution to profitability as supplies to the US and Europe are likely to fetch better margins.
Rs.500 crore, chiefly because of operating reasons, and partly due to higher other income.
The sales outlook looks robust. On the profitability front, if Cipla’s operating profit margins come to rest in a range above what was visible in 2011-12, that will affirm that its margin improvement is not a one-off event.
Cipla’s share trades at 22 times its forecast earnings per share for 2012-13, based on Thomson Reuters’ consensus estimates. That is not expensive if the company can sustain sales growth, the improvement in core margins, and squeeze more revenue out of its Indore SEZ facility.