Forex fluctuations hurt Cadila’s margins

Minus the effect of forex movements on operations, operating profit would have risen 13.7%, instead of the 2.7% decline
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First Published: Wed, Nov 07 2012. 05 20 PM IST
Sentiment is likely to turn positive again if Cadila can demonstrate that the impact of forex fluctuations on its margins in this quarter was an aberration. Photo: Ramesh Pathania/Mint
Sentiment is likely to turn positive again if Cadila can demonstrate that the impact of forex fluctuations on its margins in this quarter was an aberration. Photo: Ramesh Pathania/Mint
Updated: Wed, Nov 07 2012. 10 17 PM IST
Cadila Healthcare Ltd’s healthy sales growth was offset by a sharp decline in its profitability, disappointing investors. Its share fell 3.1% after the results were announced.
The pharmaceutical company’s consolidated revenue rose 25.2% year-on-year (y-o-y) to Rs.1,547.60 crore in the September quarter. But material costs rose by a huge 46.2%, and was responsible for a 4.2 percentage point dip in operating profit margin to 15.2%.
Material costs were affected by a fluctuation in the foreign exchange rates, which the firm cited as the main reason for the hike in material costs. It also blamed a decline in its Brazilian sales for the decline in margins.
Excluding the impact of foreign exchange movements on its operational performance, operating profit would have risen 13.7%, instead of the 2.7% decline. Even then, the margins would have declined by 1.9 percentage points. While it has no control over foreign-exchange fluctuations, if they continue to have a severe impact on margins, investors may be unable to ignore them while valuing the stock.
Sales growth was led by the domestic business, with formulation sales up 28% y-o-y, and animal health revenue up 18.8%. The wellness business continues to see relatively lower growth rates.
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Cadila’s overseas markets, barring Brazil, did well, with the US growing 19.7%, Europe by 23.1%, and emerging markets by 76%. Formulation exports rose 19%. A key highlight has been the step-up in revenue in its joint ventures, which rose 73.4% y-o-y. However, sales in Brazil (10% of formulation exports) declined 25.7%.
The company expects a rise in overseas revenue on the back of an increase in product launches in key markets such as the US, and from its joint ventures.
The drop in operating profit margin also came at a time when tax incidence has gone up because of the imposition of minimum alternate tax on partnership firms. Thus, while Cadila’s profit before tax rose 14.7%, aided by a decline in interest costs, net profit (after minority interests) fell by 7.8%.
There appear no immediate threats to Cadila’s high sales growth trajectory, though it may see a base effect kick in at some point. But concerns on its valuations are likely to revolve around whether its future results, too, will continue to see its margins suffer from forex fluctuations. If it can demonstrate that this was an aberration, sentiment is likely to turn positive again.
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First Published: Wed, Nov 07 2012. 05 20 PM IST
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