Cipla Analysis

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October 08, 2004 1

Annual Report Anal ysis

Cip la Ltd Exports drive growth

are Price Chart

SE Code 500087SE Code CIPLAEQoomberg Code VSNL@INce Value Rs10

arket Cap Rs18bnMP Rs288.4

are Holding Pattern

Industry Background

The global pharmaceuticals market stands at US$500bn growing at about 9% yoy.

North America is the largest market accounting for almost half the total global sales

followed by Europe and Japan. USA is also the largest generics market in the world

estimated at around US$17bn and growing at about 14%yoy. India currently accounts

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.

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.

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.



October 08, 2004 2


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.

Geographywise breakup of exports

Australasia

8%

North,Central

& South

America

37%

Middle East

10%

Europe

23%

Africa

22%

Source: Company Balance Sheet



October 08, 2004 3


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

15435

4213

12517

2922

98

58

0 5000 10000 15000 20000

Finished Dosage form

Bulk Drugs

Others

(Rs mn)

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.



October 08, 2004 4


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.



October 08, 2004 5


Profit and Loss account

Balance Sheet

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

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



October 08, 2004 6


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



October 08, 2004 7


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

India Infoline Ltd. All rights reserved.Regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E)

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advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any

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mentioned in this report.

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 5.0EV/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 ratiosDebt / 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

Cipla Analysis

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