Cipla: The right pill

Leveraged partnerships overseas, robust local sales does the trick for Cipla

With a sales growth of almost 63 per cent y-o-y in the March 2006 quarter, Cipla's fourth quarter performance has exceeded most analysts' expectations.

The company has leveraged the partnership model in foreign markets, coupled with a broad pick-up in domestic sales.

As a result, the stock has outperformed the broader market - in the past three months Cipla has appreciated 42 per cent compared with the Sensex gaining 20 per cent.

In the domestic market, sales expanded an impressive 56.4 per cent y-o-y thanks to an improvement in most product segments and a low base effect in the previous year.

Meanwhile, in the export market, API sales jumped 190.3 per cent y-o-y in the last quarter. However, API sales are typically lower margin, say analysts.

The higher margin formulation exports grew at a comparatively slower 30 per cent y-o-y in the last quarter. Improved export performance was driven mainly by improved performance in segments such as anti-retrovirals, anti-malarials and anti-asthmatics.

As a result, operating profit grew 31.71 per cent to Rs 180.3 crore in the last quarter, sharply lower than the sales growth. Also, its adjusted raw material cost went up by 806 basis points last quarter.

The Cipla stock fell 4.5 per cent on Tuesday, given the broad sell-off on the street. But at the bottom line level, the story was different. Owing to an almost 75 per cent fall in tax provisioning, net profit went up by 80.7 per cent to Rs 190.77 crore.

Higher contributions from Goa and Baddi plants and increased formulations exports from EOU plants have resulted in the lower tax outgo. After assuming an EPS growth of 20 per cent, the stock trades at about 25 times FY07 earnings, which is high.

Subex-Azure: A win-win deal

The acquisition of UK-based Azure Solutions will make niche software product company Subex a dominant vendor to telecom companies worldwide.

Subex is a major player in fraud management, while Azure is strong in revenue assurance solutions. Azure has a large client roster of telecom firms, which will help Subex cross-sell its products, as well as technology capabilities.

This acquisition will by way of a share swap and, according to the management, it will result in an equity dilution of about 34 per cent.

The price of $140 million for Azure appears high at about 4.5 times revenues, but comparing it with Subex's enterprise value-sales of 7.33 times, it does not seem so expensive. Also, analysts say that since both are product companies, the multiples are likely to be high.

Though some products between the two companies do overlap, the merged company Subex Azure will be able to offer a wider basket of products. Azure is also present in inter-connect billing, while Subex isn't. Azure was spun off from British Telecom in 2003, and is now owned by private equity funds.

The potential for fraud management and revenue assurance solutions for telecom firms is big. The Subex stock has run up about 40 per cent in the past week, clocking a 15 per cent gain on Tuesday. While trailing valuations of Subex at 36 times FY06 EPS appear expensive, the market seems to be expecting a lot out of the merger.

ABB: On a roll

The upturn in the capex cycle is well known, but ABB's March 2006 quarter results were better than analysts forecasts.

Its operating profit grew an impressive 87.1 per cent y-o-y to Rs 69.45 crore in the last quarter, much faster than the 32.1 per cent growth in net sales to Rs 802.91 crore.

The improvement in ABB's operating profit was mainly on a 232 basis point y-o-y fall in the adjusted material and cost of erection services as a percentage of net sales to 73.08 per cent in the last quarter. Lower material costs are largely due to steel prices which were about 12-15 per cent lower on a y-o-y basis in the last quarter.

As a result, ABB's operating profit margin expanded 254 basis points y-o-y to 8.64 per cent in the March 2006 quarter.

Despite the improved performance in the last quarter, the ABB stock dipped 3.25 per cent to Rs 3029.45 on Tuesday, given the broad sell-off on the street. In CY05, the company had seen its operating profit margin improve by 132 basis points y-o-y to 10.73 per cent.

ABB's revenue growth in the last quarter was largely powered by improved performance of its power systems and automation products divisions.

The company booked a record order intake of Rs 1401.9 crore during the March 2006 quarter, representing a growth of 57 per cent on a y-o-y basis. With the growth prospects for the company remaining bright in the medium term, the stock gets a discounting of almost 40.75 times estimated CY06 earnings.