Cipla: Health pangs

Higher operational costs and a 12 per cent rupee rise put pressure on margins

Though Cipla reported strong exports growth and received a milestone payment of Rs 74.8 crore, the higher operational costs and a 12 per cent rupee appreciation put pressure on margins in the December 2007 quarter.

As a result, the company's core operating profit grew 23.4 per cent y-o-y to Rs 262.3 crore and net sales improved 25.5 per cent to Rs 1104.5 crore in the last quarter. Its operating profit margin declined 40 basis points y-o-y to 23.7 per cent in the last quarter.

Margins came under pressure, with other expenditure as a percentage of net sales rising 250 basis points y-o-y to 23.9 per cent in Q3 FY08.

Other expenditure went up in the last quarter due to higher advertisement, repairs and maintenance costs.

In contrast, Ranbaxy's operating profit margin improved 60 basis points y-o-y to 15.6 per cent in the December 2007 quarter.

Meanwhile, in Q3 FY08, Cipla's total exports increased 22.3 per cent y-o-y to Rs 510.9 crore. Its higher margin formulation exports, however, rose by only 19.2 per cent.

Analysts highlight that as the company's lower margin API exports grew 31.2 per cent y-o-y in the last quarter, higher operational costs were not fully absorbed. Cipla's sales in the domestic market increased 19.3 per cent in the last quarter.

Going forward, a strong rupee could continue to put pressure on Cipla's operating margins. The stock trades at 24 times estimated FY08 and 19 times FY09 earnings.