Though Cipla beat the Street’s expectations by a long shot, analysts believe the exceptional growth seen in the first half might not continue through the year. Like the first quarter, the second quarter too, has seen a bump-up in profits due to the supply of anti-depressant drug escitalopram (generic of Lexapro) to Israel’s Teva, which has enjoyed an exclusivity window of 180 days to market the generic drug. Escitalopram has also helped Cipla boost its operating margin, as supplies were to one customer and there were no marketing spends.
Operating margin for the quarter jumped to 30.5 per cent in the September quarter, from 24 per cent in the corresponding quarter last year. As a result of this sharp improvement in profitability, Cipla’s net profit has grown 62 per cent year-on-year (y-o-y) to Rs 500 crore in Q2FY13, while the market was estimating net profit at Rs 360 crore. However, analysts say that though the company posted robust numbers in the first half, this may not continue in the second half of the financial year when the exclusivity period ends. Analysts expect margins to return to the 23-25 per cent range in the second half of 2012-13. However, what may continue is the control on expenses. The company’s material costs have come down by 280 basis points and that has also added to the margin expansion.
Like most other pharma companies, exports account for a bigger share of revenues than domestic sales. Exports accounted for 56 per cent of the company’s sales and the company’s exports of formulations grew by 38.2 per cent y-o-y to Rs 1,039 crore in Q2, while exports of bulk drugs grew nine per cent to Rs 174 crore. Export growth was largely driven by growth in the anti-depressant, anti-ulcerant and anti-asthma segments.
In comparison, the domestic market has grown at a slower pace. Cipla’s domestic revenues grew 13.5 per cent y-o-y to Rs 962 crore in Q2. Going forward, the market is confident that the company will be able to clock robust growth in the domestic market as well as in exports. IDFC Securities says the company’s cash increased by Rs 900 crore in the first half and fixed assets are down, hinting that capital expenditure might be coming off. A re-rating is likely, as growth will continue even if margins don’t sustain at last quarter’s levels.