Annual Report Analysis

Cipla Ltd
Exports drive growth

BSE Code 500087 Industry Background

NSE Code CIPLAEQ The global pharmaceuticals market stands at US$500bn growing at about 9% yoy.
Bloomberg Code VSNL@IN North America is the largest market accounting for almost half the total global sales
Face Value Rs10 followed by Europe and Japan. USA is also the largest generics market in the world
Market Cap Rs18bn
estimated at around US$17bn and growing at about 14%yoy. India currently accounts
CMP Rs288.4
for less than 8% of the world pharmaceutical consumption and is the fifth largest
producer of pharmaceutical products in the world. The Indian retail pharmaceutical
market is estimated at Rs200bn with an annual growth rate of 7% in FY04.
Share Holding Pattern In the wake of hosts of drugs going off patent in the US, approximately US$80bn,
and increasing healthcare costs in developed countries, Indian pharma companies
especially the larger players can seize this opportunity and gain market share in the
global generics market which is about six times the size of the domestic formulation
market. Presently, Indian companies account for up to a third of the regulatory filings
with the US FDA and India has the largest number of US FDA approved plants
outside USA.

Share Price Chart
Company Background
The Chemical, Industrial & Pharmaceutical Laboratories which came to be popularly
known as Cipla was founded by Dr K.A. Hamied in 1935. A Mumbai-based company
currently Cipla is a leading domestic Indian pharmaceutical company with a market
share of about 5.85% and crossed Rs20bn mark in revenues during FY04.The
company is currently ranked first in trade sales as per the ORG IMS retail audit.

Business
Cipla’s businesses are broadly divided into the following segments:
• Formulations
• Bulk drugs & Intermediates
• Technology services

Formulations
In the domestic market Cipla is a leading player in the formulations segment. Cipla
manufactures and markets wide range of formulations in various conventional and
advanced dosage forms such as tablets & capsules, liquids, creams, aerosole, inhalation
devices, injections and sterile solutions; covering a large number of therapeutic segments
the main ones being anti-asthmatics, anti-biotics, cardiovascular, anti-AIDS and anti-
diarrhoeals. The formulations segment is divided into prescription drugs and OTC
products. The OTC product range covers therapeutic areas such as analgesics-oral,
calcium preparations, cold & flu, dental care etc. The formulations segment is Cipla’s
main stay and contributes over 75% of the company’s gross revenues.

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 Annual Report Analysis

Bulk Drugs & Intermediates

The company manufactures more than 150 bulk drugs and intermediates and derive
about 20% of revenues from this segment including exports of bulk drugs. Cipla has
a total installed capacity of 2101 tons for bulk drug production while capacity utilization
is at 47% with actual production of bulk drugs in FY04 at 981 tons.

Technology Services
Cipla also offers technology for products and processes and derives revenues in the
form of Royalty, technology know-how fees and licensing income under this segment.
The company earned revenues of Rs544mn from technology services in FY04 as
against Rs69mn in FY03.Though the scale is small the growth momentum is high in
this segment.

Manufacturing Facilities
Cipla’s has manufacturing facilities for bulk drugs and formulations in Patalganga,
Vikhroli, Bangalore, Kurkumbh and Goa. A number of dosage forms and API’s
manufactured in the company’ various facilities have several regulatory approvals
including the US FDA, MHRA UK, PIC Germany, MCC South Africa, TGA Australia,
WHO Geneva and the Department of Health, Canada. The company is in the process
of setting up a new formulation plant at Baddi in Himachal Pradesh.

Financial Analysis
High growth in revenues
Gross sales of the company were at Rs 20,910mn in FY04 recording an impressive
growth of 28% yoy. The sales growth was driven by exports of both API and
formulations at Rs8,123mn, a 44% yoy growth. Total exports contributed, to about
38% of gross revenues in FY04.
Geographyw ise breakup of exports
North,Central Africa
& South 22%
America
37%
Australasia
8%

Middle East Europe

10% 23%

Source: Company Balance Sheet

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 Annual Report Analysis

The company grew at a CAGR of 25% in the period FY01 to FY04.Its presence in
the regulated markets increased significantly due to buoyancy in exports. The company
is now focussing on increasing its presence in the finished dosage formulations (generics)
segment overseas. It has consolidated existing alliances and entered into new
arangements with leading US generic companies for supply of finished dosage
formulations. Similar arrangements are worked out in other overseas market.

Segment wise revenue breakup

58
Others 98

2922
Bulk Drugs 4213

12517
Finished Dosage form 15435

0 5000 10000 15000 20000

(R s m n)
2003-04 2002-03

Source: Company Annual Report

The company derived 78% of its revenues from finished dosage segment in FY04
while bulk drugs contribute 21 % to gross sales in FY04.

New products launched

The company introduced the following formulations in FY04.
Product Dosage form Purpose
Adesera tablets Hepatitis B
Dorzox eye drops Glaucoma
Dytor tablets & injection Diuretic
Ginette 35 tablets Acne & hirsutism
Rizact tablets Acute Migraine
Valcivir tablets Antiviral for herpes

Spurt in other income component

Other income in FY04 was at Rs1164mn as against Rs492 in FY03 on account of
higher technology know how fees of Rs544mn as against Rs69mn in FY03. Cipla’s
technology is presently sold to companies in Canada, Ecuador, Germany, Ivory Coast
Saudi Arabia, UK and USA. Other Income also increased on account of increase in
net exchange gain and export incentives on the back of significant surge in export
revenues.

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 Annual Report Analysis

Dip in operating profit margins

Though the company posted a 27% yoy growth in sales, its operating profit margins
dipped by 200bps from 20.4% in FY03 to 18.4% in FY04 on account of increase in
raw material cost and employee cost which were up 38% and 30% yoy respectively
in FY04. Raw material costs accounted for 47% of the total revenues and the increase
in capacities and production scale lead to higher raw material costs in FY04. The
second phase of manufacturing operations in Goa were commissioned in FY04.

Increase in loan funds & interest expenses

The total loan funds increased from Rs948mn in FY03 to Rs2,106mn FY04.Increase
in loan fund is due to increase in unsecured loan portfolio of Rs1,141mn.Out of the
total unsecured loans a sum of Rs1,749mn is payable within the next 12 months. The
interest outgo has also increased in the same proportion from Rs17mn in FY03 to
Rs104mn in FY04.However, the debt equity ratio remains low at 0.17 in FY04.

Working capital management

Net working capital increased by 89% from Rs6.9bn in FY03 to Rs7.6bn in
FY04.Debtor days increased to 98 days on the back of increased export sales while
inventory days and creditor days fell to 113 days and 35 days respectively in FY04.
However as a percentage of net sales net working capital fell from 48% of net sales in
FY03 to 41% in FY04.

Outlook
Exports of API’s and formulations witnessed good growth and this trend is likely to
continue going forward on the back of the huge global generics opportunity and Cipla’s
strong strategic alliances with global pharmaceutical companies. Currently Cipla exports
to over 150 companies across the globe and has an alliance with leading US generics
companies such as Ivax, Watson etc.
The other growth engine of the company is its technological excellence and the
company’s focus on new drug delivery systems (NDDS) such as inhaler products.
The future strategy of the company is to forge and strengthen the existing strategic
alliances with global pharma majors in order to expand its international operations,
particularly in the generics segment.

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 Annual Report Analysis

Profit and Loss account

Period to FY01 FY02 FY03 FY04
(Rs in mn) (12) (12) (12) (12)
Net Sales 9,667 12,745 14,373 18,422
Operating expenses (7,513) (9,848) (11,439) (15,038)
Operating profit 2,154 2,897 2,934 3,384
Other income 386 430 492 1,164
PBIDT 2,540 3,327 3,426 4,548
Interest (8) (21) (17) (104)
Depreciation (156) (214) (284) (514)
Profit before tax (PBT) 2,376 3,092 3,125 3,930
Tax (585) (1,017) (648) (878)
Profit after tax (PAT) 1,791 2,075 2,477 3,052
Extraordinary / prior period items (96.45)
Adjusted profit after tax (APAT) 1,791 2,075 2,477 2,956

Balance Sheet
Period to FY01 FY02 FY03 FY04
(Rs mn) (12) (12) (12) (12)
Sources
Share Capital 600 600 600 600
Reserves 6,647 8,302 10,101 12,041
Net Worth 7,247 8,901 10,701 12,641
Loan Funds 240 339 948 2,106
Deferred Tax liability 562 659
Total 7,487 9,240 12,211 15,406
Uses
Gross Block 2,838 4,187 5,170 7,408
Accd Depreciation (997) (1,211) (1,459) (1,932)
Net Block 1,841 2,975 3,710 5,476
Capital WIP 31 19 288 560
Total Fixed Assets 1,872 2,994 3,999 6,036
Investments 2,229 1,437 1,266 1,804
Total Current Assets 6,340 9,705 12,911 14,362
Total Current Liabilities (2,956) (4,501) (5,966) (6,796)
Net Working Capital 3,384 5,205 6,945 7,566
Miscellaneous expenditure 2 2 1
Deferred Tax assets (397) 0
Total 7,487 9,240 12,211 15,406

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 Annual Report Analysis

Cash Flow Statement

Period to FY02 FY03 FY04
(Rs mn)
Net profit before tax and extraordinary items 3,092 3,125 3,930
Depreciation 214 284 514
Interest expense 21 17 104
Interest income (113) (68) (80)
Dividend income (32) (0) (3)
Operating profit before working capital changes 3,182 3,358 4,464
Add: changes in working capital
(Inc)/Dec in
(Inc)/Dec in sundry debtors (1,052) (1,007) (1,429)
(Inc)/Dec in inventories (1,209) (1,930) 203
(Inc)/Dec in other current assets 8 10 (50)
Inc/(Dec) in sundry creditors 400 553 (266)
Inc/(Dec) in other current liabilities 1,145 913 1,096
Net change in working capital (709) (1,461) (446)
Cash from operating activities 2,474 1,896 4,018
Less: Income tax (1,017) (648) (878)
Inc/Dec in Def Tax Asset/liability 397 165 98
Misc expenditure w/off 1 1 1
Net cash from operating activities 1,854 1,414 3,239
Extraordinary inc/(exp) 0 0 (96)
Cash Profit 1,854 1,414 3,143
Cash flows from investing activities
(Inc)/Dec in fixed assets (1,337) (1,288) (2,551)
(Inc)/Dec in Investments 792 171 (538)
Interest received 113 68 80
Dividends received 32 0 3
Net cash from investing activities (399) (1,049) (3,005)
Cash flows from financing activities
Inc/(Dec) in debt 99 609 1,158
Direct add/(red) to reserves (211) (224) (1,016)
Interest expense (21) (17) (104)
Dividends (209) (454) 0
(Inc)/Dec in loans & advances (1,015) (303) (244)
Net cash used in financing activities (1,357) (390) (206)
Net increase in cash and cash equivalents 98 (25) (69)
Cash at start of the year 58 156 131
Cash at end of the year 156 131 62

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 Annual Report Analysis

Ratios
FY01 FY02 FY03 FY04
(12) (12) (12) (12)
Per share ratios
EPS (Rs) 29.9 34.6 41.3 49.3
Div per share 3.0 3.5 10.0 15.0
Book value per share 120.8 148.4 178.4 210.8
Valuation ratios
P/E 0.0 0.0 0.0 6.1
P/BV 0.0 0.0 0.0 1.4
EV/sales 0.0 0.0 0.0 1.1
EV/ PBIT 0.0 0.0 0.0 5.0
EV/PBIDT 0.0 0.0 0.0 4.4
Profitability ratios
OPM (%) 22.3 22.7 20.4 18.4
PAT (%) 18.5 16.3 17.2 16.0
ROCE 36.0 38.3 31.8 34.3
RONW 24.7 23.3 23.2 23.4
Liquidity ratios
Current ratio 2.1 2.2 2.2 2.1
Debtors days 56.5 72.9 90.2 98.7
Inventory days 104.0 113.5 149.6 112.7
Creditors days 41.2 42.7 51.9 35.2
Leverage ratios
Debt / Total equity 0.03 0.04 0.09 0.17
Component ratios
Raw material 50.3 47.5 49.8 56.0
Staff cost 5.2 5.0 5.1 7.5
Other expenditure 22.3 24.8 24.7 16.0
Payout ratios
Dividend Payout Ratio 11.1 10.1 27.3 34.3

Published in October 2004. © India Infoline Ltd 2003-4.

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