Cipla succeeds where others failed
Cipla Ltd’s June quarter earnings and its subsequent management commentary were music to investors’ ears, compared to what its bigger drug maker peers had to say.
The company did suffer from the twin problems of goods and services tax related disruption in India and price erosion in the US market, but its financials bore the pain well.
Revenue growth held up as Cipla managed to launch new products in the US and its other regions held up growth too. The company said its plants remain compliant after inspections during the quarter, which is a relief to investors accustomed to bad news on inspections. But do remember every company is only as good as its last inspection.
Cipla’s sales declined by 3.5% from a year ago to Rs3,432 crore in the June quarter, and 1.6% sequentially. Its US market sales rose by 2% from a year ago and by 4% sequentially. The company launched four new products during the quarter and plans to launch one differentiated product every quarter, beginning the current or the next quarter. It expects to continue this momentum for two-three years.
In India, the company’s sales declined by 13% from a year ago but rose by 4% sequentially. The sequential improvement ought to be disregarded, as a high proportion of sales are from products to treat acute ailments (such as infections) that are seasonal, said the management. And, based on how July has turned out, sales in the rest of fiscal year 2018 should recover well. Business in its Africa region did well, with sales rising by 10% from a year ago.
Cipla’s financials held some surprises. Its material costs declined sharply (see chart), which led to a higher gross margin. Some of this was due to the disruption in India sales, which affected the mix. Its gross profit margin (gross profit here is sales less material cost) widened by 4.2 percentage points from a year ago. Of this, about 1.5 percentage points can be attributed to be one-off factors, while the rest is sustainable. The sustainable part is due to changes in product mix, portfolio rationalization and cost cuts.
While its employee costs too were held in check, research expenses were at 6.2% of sales versus 6.7% a year ago. But this figure could increase, due to phasing of research activities, but the full-year figure will be under 8%, said the company.
Still, all these savings allowed Cipla a 5.8% increase in Ebitda (earnings before interest, tax, depreciation and amortization) over a year ago, and a 27.7% sequential increase.
While these numbers are good, Cipla exudes confidence that it can deliver on sales growth in regulated markets in the next few years. If its US launch calendar is met, revenue growth and profitability will both benefit.
Investors think Cipla can deliver and that optimism is what sent its shares up by 5% on Monday. Investors will keep a close watch for the first launch announcement in the next few months.