Cipla’s March quarter performance: Low margin business and high costs continue

Profitability of drug major Cipla continued to be afflicted by low-margin anti-retroviral business and high staff cost and overheads for the second consecutive quarter. The consolidated revenues grew at 27% - driven by growth in export sales. However, the operating profit dropped 4% and operating margin contracted 530 bps to 16.8%. Net profit also declined by 6% over the year ago level.

International business contributed more than 60% of the overall revenues with sales from formulation exports growing 30% and export sales of active ingredients rising by 37%. Low margin anti-retroviral business still remains a significant driver to the company’s revenue growth. The sales from the domestic business grew strongly at 19% - higher than the industry growth, driven by growth in respiratory, anti-infective and cardiac therapies. The company has increased its market share from 4.7% to 5.3% in the domestic market for FY14.

The employee cost consumed 17.6% of the consolidated revenues. A spate of recruitments right at the senior management level to building front ends in various developed markets has increased the staff cost. Likewise, overhead cost has also been high at 28% of the total revenues.

The management has guided a growth of 15% in revenues and operating margin of 21% for the current fiscal. The second half of the fiscal is likely to be better than the first due to launch of combination inhalers in Europe. Cipla also expects to launch 15-20 generic products in the US during this fiscal. Investors will have to wait for another few quarters before they can expect Cipla to start delivering increased profitability and healthy growth in the bottomline.