Cipla takes a cautious approach towards tender business to protect margins

Tender business, which accounts for around 20% of consolidated sales, came under pressure because of intense competition and aggressive pricing

Drugmaker Cipla will participate cautiously in global tenders to protect margins after reporting muted revenue growth in the second quarter. Its net profit for the quarter declined 11 per cent to Rs 3.77 billion from Rs 4.23 billion in the same period last year following a 2 per cent decline in revenue. Revenue from operations stood at Rs 40.12 billion in the quarter. The company stock fell 7.33 per cent and closed at Rs 563.90 on BSE on Monday.

While sales in the US grew 23 per cent, revenue from domestic operations remained flat. If one takes out the impact of the depreciation of the Indian currency vis-a-vis the dollar, the US business has grown by 8-9 per cent sequentially, said a senior company official. Tender business, which accounts for around 20 per cent of consolidated sales, came under pressure because of intense competition and aggressive pricing. 

Tender business accounts for a chunk of its revenue in South Africa, sub-Saharan Africa, and other emerging markets. 

In the emerging markets, the tender business accounts for one-third of its revenues, while in South Africa it accounts for 20 per cent of the revenues from that geography. “The tender business is important for us. However, we will be taking a measured approach while participating in the business,” said Kedar Upadhye, Cipla’s global chief financial officer. This, he believes, will help the company protect its profit margin. Ebidta margin in Q2FY19 stood at 18.8 per cent. Upadhye did not wish to give any guidance for Ebitda margins in the coming quarters.

Cipla blamed the weak result on the high base in the domestic market. Its domestic revenue remained flat on year on year basis and the management said the high base of the previous year was due to restocking of products after the goods and service tax implementation. 

Upadhye said the company would continue to focus on high margin limited competition products in the US market and would rationalise its research and development spend accordingly. The firm has been filing aggressively to build a product portfolio in the US market in the past three years. Now, however, it plans to reduce the number of filings and focus only on limited competition products for the US market. 

“We have been filing 20-25 products each year in the US each year and now we will be selective in our filings. We plan to do 12-15 filings a year,” he said. The research and development spending was around 8 per cent of sales in Q2FY19.