Cipla: In the pink

Surge in exports helps Cipla to post significantly better results

Cipla Ltd has reported a 117 per cent growth in its Q4FY04 net profit to Rs 101.74 crore. A surge in domestic sales (up 34 per cent to Rs 264.22 crore riding on anti-asthmatics and cardiovasculars) and exports (up 55 per cent to Rs 281.79 crore due to sales of Aids drugs and anti-depressants) helped.

It is commendable that the company's overseas sales account for 52 per cent of total sales. The improved performance was in line with analysts' expectations.

No wonder, then, that the share ended just 1.2 per cent up at Rs 1265.4 on Wednesday. While Cipla's core operations have grown, its supply chain costs too have risen "" staff costs have jumped up 35 per cent to Rs 25.8 crore in Q4FY04.

With the company expanding its research & development activities and marketing network, an increase in overheads was inevitable. Also, the cost of raw materials have darted up 31 per cent to Rs 293.83 crore in Q4FY04.

However, the rise in sales compensated for the increase in input costs "" operating profit margin rocketed 1000 basis points to 22 per cent in the March quarter and operating profit rose 350 per cent to Rs 129.19 crore.

It has also been reported that Cipla will subdivide its equity shares from Rs 10 to Rs 2 and this measure should help to significantly improve the liquidity on this counter.

Going forward, with the Bill Clinton Foundation extending its program to provide cheap generic Aids drugs to the whole of the developing world, Cipla's exports should expand aggressively in the next 2- 3 quarters, as it manufactures all the 12 products of anti-AIDS compounds.

Forward dollars

Since the second half of 2003, forward dollars time and again have been slipping into discount territory. This essentially means that future dollars are available cheaper than present-day dollars.

This happens when the demand for dollars today or tomorrow is much higher than the demand three months or six months down the line. Future dollars are required to be bought on today's date, when one is taking a forward cover to avoid future fluctuations in the currency market.

such buyers are the importers who have to make payments in dollars. This strategy is called taking a forward cover. However, with an appreciating rupee to dollar, the need for taking a forward cover has diminished.

On the other hand, with dollars being cheaper, Indian borrowers have borrowed in foreign currency and not in rupees.

Therefore, there is a shortage of dollar funds with the banks who have lent out of their dollar-denominated deposits such as FCNR(B). Even though foreign exchange inflows are making their way into the Indian market, these are being absorbed by the Reserve Bank of India (RBI) through dollar buying by public sector banks.

Moreover, for the redemption of the Resurgent Indian bonds in October 2003, the RBI had entered into sell-buy swaps with banks. This meant that RBI sold dollars to banks with an underlying contract to buy them back so as to facilitate the availability of dollars to the RBI for paying back holders of Resurgent India Bonds in dollars on the date of redemption.

However, on the due date, most of the banks had to roll back the swaps as they were not in a position to pay back the dollars to the RBI and preferred to pay later due to acute shortage of dollars in the cash market.

Those contracts are still getting rolled over, although the volumes have been coming down each month. This acute shortage of dollars with banks surfaces each time there is a demand for dollars either for import payment or otherwise.

The shortage leads to a premium on cash dollars, while forward dollars for various maturities are cheaper to the extent of being available at a discount rather than a premium. Last week, cash dollars were available at premium of 7 per cent only to be sold tomorrow, referred to as cash tom buy-sell.

Therefore, dealers are of the view that till the time banks get back their dollars which they had lent in bulk or could manage to mop up dollars through some other means, these rollovers will continue and forward dollars will periodically slip into discount zone.

However the recent measure of the RBI to restrict import credit up to $20 million for periods between one year and three years only for capital goods is expected to help banks to reserve some dollars for themselves.

By this measure, corporates are being encouraged to prefer rupee loans, saving dollars to that extent.

With contributions from Amriteshwar Mathur and Anindita Dey