Cipla Limited (Cipla) is a pharmaceutical company focused on developing new formulations for existing and new drug substances

. It derives approximately 55.0% of its income from operations outside India. It is making large investments in formulations facilities at Sikkim, Goa, and Indore that would make the finished forms of medicines.

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years 2000 to 2008.
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Revenue: Increasing trend with average growth of 24% (SDev. 9%). Earnings per share: Increasing trend with average growth of 24% (SDev. 16%).

Net cash flow from operations: Overall, the net cash flow from operations has an increasing trend. However, the net cash flow is consistently less than reported net profit. I would like to understand (if possible) how company is showing continued profit is when its cash inflows are always lower. Profit/Loss from operations: Looking at standalone profit only, the corporation is showing consistently increasing profits from its operations.
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Reported net profit: Increasing trend.

Gross margins: Sustainable gross margin, averaging 19.5% (with a very narrow standard deviation of 1.36%). Purely on numbers alone, this may seem very good. However, I would like to understand how company is able to maintain such a tight control on its profitability. Operating margins: Sustainable operating margin, averaging 22.2% (SDev. 1.20). Again, I would like to understand the narrow standard deviation.

In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.

Dividend per share: Chart 3 shows the dividends have decreased relative to 2005. It ANALYSIS has become stagnant.
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Payout factor: This is ratio of dividends per share dividend by EPS. It was sharing large percentage of its profits (39% to 75%) with its shareholder. However, it has now dropped to low 20%s. What is reason that company decided to share less of their earnings with their shareholder?

Since 2003.0.08 times the cash flow from savings interest. and (2) savings interest rate is 7%.5% of expected return into the worst case dividend growth of 2% and current yield of 0. fixed deposits. because company has to service its debt! This wild swings in this ratio is not a good sign for me. and in 2007 it was at 2.17 x [expected market return.  Worst case scenario: considering low end of the dividend growth of 2% for last five years. The stocks eight year Beta value is 0. 48.7. The company seems to have taken on debt. 7. For me this is not a good sign. the total cash flow is 1.t.5% – risk free return.45 times the savings interest rate.5%. So stay tuned!  Now factoring in 8. This means Cipla’s stock is relatively less volatile w. the dividend cash flow will be only 0. the current yield should be 4.9%.0%] + Beta. the dividend cash follow will be only 0. it has been very flirting with 1. Until 2003/04. I would like to see growth in dividends that covers inflation. 0.10.21 times the cash flow from savings interest. 2007).e. I would like to understand where are all of profits coming from?  Ratio of profits from operations to reported net profit: This ratio is more than one.  The expected return is 8.  Ratio of Cash from operations to total debt: This ratio is all over the place.00. The baseline assumptions are (1) the stock’s dividend yield is 0.  Ratio of cash from operations to reported net profit: This ratio is consistently less than one. and 0% (2006. I try to understand how dividends will affect my cash flow in 10 years of time period.0. dividends = savings interest) in 10 years time period. S&P CNX NIFTY index.  In order to have equal cash flow (i.Dividend growth rate: The rate of dividend growth is highly variable. I will provide more details on this calculation in future post.9% at current price of Rs.17.3% with worst case dividend growth of 2%. Is this showing up as less dividends. 15. 7. I am also concerned that good economy of 2006 and 2007 did not result in any dividend growth. 227. Expected return = [risk free return. A silver lining.  DIVIDEND CASH FLOW V/S RISK FREES SAVINGS CASH FLOW: Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings. Best case scenario: considering average dividend growth rate of 13% for last eight years. It is -43% (2005).0%]. Here. At this yield the buy price is Rs. I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.  BETA-BASED EXPECTED RETURN: I measured Beta of Cipla’s stock risk (or price movement) relative to the S&P CNX NIFTY (or index movement).r.  . or any such risk free accounts? Therefore. it was doing more than 1. At a minimum.

Rating CARE has assigned a 'CARE AAA' [Triple A] rating to the Long-term Bank Facilities of Cipla Limited (Cipla). I was not impressed. and capacity expansion. Throughout his speech the focus was on humanitarian aspect of low cost drugs. The company has embarked upon a capacity expansion. I took are quick look at company Chairman’s August 2008 speech.6 Pricing based on PE ratio of 12: Rs. 580 crore (in 2008). I would like to understand how the company is showing consistently higher profits when its cash flow from operations are lower. offering highest safety for timely servicing of debt obligations.FAIR VALUE CALCULATION Based on the analysis so far. In addition. 97. Cipla’s near future focus is on capacity expansion. However.9 The range of fair value is calculated as Rs.      NPV price based on 15 year DCF: Rs.0 Pricing relative to 8 year average PE ratio: Rs. impact of patent concern.7 Graham number: Rs. . 24 crore (in 2000) to Rs. revenue growth. 95. 100. 115. Such facilities carry minimal credit risk. This expansion seems to be funded by combination for debt and increasing capital base.4 Average high yield price calculated based on past 8 years: Rs. Facilities with this rating are considered to be of the best credit quality.5. This is determined by taking average of above five parameters and using one standard deviation for high and low values. I would have liked to see what the company is doing in future. The balance sheet shows that the total debt has increased from Rs. 120. QUALITATIVE ANALYSIS Cipla has a long history of operating in a generic pharmaceutical space making new formulations and new generic drugs. I am continuing my analysis to estimate the fair value and understand risk return characteristics for my readers. In addition to present state-of-business. 192. While it is showing growth in term of revenue. market share. I do not believe Cipla will be a good long term investmentfor my risk profile and my long term strategy. 101.0 to Rs. the company capital base increased in 2006 (from Rs 60 crore to Rs 155 crore) and it also diluted its share count by splitting shares in 2004. This rating is applicable for facilities having tenure of more than one year.

The ratings also take into account the company's healthy profitability margins. Yusuf. The ratings take into account experienced promoters and management. growing at about 10-15% annually.diversified product portfolio. The company has presence across 180 regulated. Hamied.500 crore of Cipla. Operations of the Company Cipla is one of the leading players in the generic pharmaceutical business with a wide range of products across therapeutic segments. with additional facilities coming up during FY09-FY10. Most of the recent facilities of the companies have been planned in regions that extend tax . Chairman and Managing Director of the company. geographically spread presence with footprints in both the regulated and the unregulated markets and a well. The above ratings are assigned to Short-term Bank Facilities (Rs.50 crore) aggregating Rs. Further.1. The company launched its first product in 1937 and has since then expanded to establish multi-location manufacturing unit s in India which manufacture more than 1500 drugs.734.1. Dr. This rating is applicable for facilities having tenure up to one year. including limits interchangeable with long-term facilities). The company has more than 20 manufacturing facilities in India spread over seven different locations.384. CARE has also assigned a 'PR 1+' [PR One Plus] rating to the proposed Term Loan/CP/NCD issue of Rs. including a number of Active Pharmaceutical Ingredients (API) and drug delivery systems. low gearing levels and its joint ventures/partnership model of doing business in regulated markets insulating the company from litigation risks. The ability of the company to maintain margins amidst increasing competition and fluctuating exchange rate.135 crore.5 crore. established position as a generic player with dominant position in domestic market.215 crore) and Long/Short-term Bank Facilities (Rs. Instruments with this rating would have strong capacity for timely payment of short. Long-term Bank Facilities (Rs. and the outcome of litigation under National Pharmaceutical Pricing Authority (NPPA) are the key rating sensitivities. lack of presence in high risk high value-added like New Chemical Entity (NCE) Research. with more than 50% of its revenues coming from exports . semi-regulated and non-regulated countries globally. Industrial & Pharmaceutical Laboratories by Khwaja Abdul Hamied. Although the proportion of domestic revenues in total revenues has been declining over the years. He is assisted by a team of qualified and experienced professionals. has presence in about 180 countries across the globe. looks after the day-to-day operations of the company. Facilities with this rating would have strong capacity for timely payment of short-term debt obligations and carry lowest credit risk.term debt obligations and carry lowest credit risk. Background Cipla was established in 1935 as the Chemical. The company started exporting its products in 1964 and today.CARE has also assigned 'PR1+' [PR One Plus] rating to the Short-term Bank Facilities of Cipla. Cipla is one of the leading players in its segment domestically.

benefits. . which will help the company to reduce its effective tax rate in the coming years.

10 provides a total expected return of 1.5. 120. In addition. I do not plan on holding Cipla stock in my income portfolio.  I make an investment in a company with an expectatoin that I will hold it for 10+ years. . I expect a company to pay me consistently growing dividends. However. Cipla would be an attractive investment to investor whose objective is to have less volatile stock in their portfolio. During my holding period. the total expected return would be 1.57 times the savings interest cash flow.45 times the saving interest cash flow.  Waiting for initiating a position at Rs. Initiating a position at current pricing of Rs 227.SUMMARY… The analysis shows that Cipla falls short for my income portfolio’s long term (10+ years) objective of dividend-based cash flow and capital appreciation. I also expect that my capital appreciation remains somewhat near to the market appreciation. The stock price is already at PE of 25.

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