The drop in profitability is attributed to lower operating margins, lower other income and higher depreciation.

Sales for the 1Q02 were up by 23% from Rs. 241.79 Cr. to Rs. 297.89 Cr. Total expenses went up from 79.8% to 80.8% of sales due to the increase in personnel and other expenses. Material cost along with the stock adjustment declined from 48.3% to 46.6% of sales due to efficiency in material procurement and the change in product mix. Personnel expenses went up from 4.8% to 5.2% of sales. Other expenses jumped from 26.7% to 28.9% of sales. The operating margin dropped from 20.2% to 19.2%. Other income declined by 19% from Rs.7.58 Cr. to Rs. 6.12 Cr. EBIDTA margins were down from 23.3% to 21.3% with a decline of 200 basis points. Interest was lower by 38% from Rs. 0.40 Cr. to Rs. 0.25 Cr. Depreciation went up by 27% from Rs. 3.75 Cr. to Rs. 4.75 Cr. Profit before tax increased from Rs. 52.29 Cr. to Rs. 58.40 Cr. There was a marginal increase in tax provision of 4% from Rs. 13.50 Cr. to Rs. 14.00 Cr. The tax provision was higher due to the inclusion of deferred taxation. Net profit was up by 14% from Rs. 38.79 Cr. to Rs. 44.40 Cr.

Cipla has lined up a number of new product launches for the 2Q02 to maintain its top line growth rate. The company has the largest number of products in the generics segment. Cipla has entered into the FMCG segment with the launch of shaving cream, toothpaste, baby powder and cold cream.

Cipla is pioneer in the anti-AIDS segment offering the full range of drugs required for the AIDS therapy. The company was the first to launch Lamivudine- anti AIDS drug in India. Cipla came to the limelight when it offered its cocktail of anti-AIDS drugs for US $350 per patient per year to Medicins Sans Frontiers (MSF), a voluntary health organization.

The company has entered into $ 3.5 million (Rs. 16.5 Cr.) agreement with the Nigerian government for the supply of its cocktail of anti-AIDS drugs at $ 350 per patient per year. Cipla has signed a protocol with the Cameroon government for the supply of anti-AIDS cocktail at $ 350 per patient per year. The expected sale from this supply is $ 2 million (Rs. 9.5 Cr.) per annum. As many as 39 MNCs have dropped the case against the African government which is expected to boost the demand since the prices of anti-AIDS drugs charged by MNC are 10-20 times higher than Cipla’s prices. We expect that the other African countries with an estimated 25 million AIDS cases will also source the anti-AIDS drugs from Cipla.

Cipla is the leading player in the anti-asthmatic segment and offers both oral products and inhalers. The company is putting up a dedicated manufacturing facility for inhalers at Kurkumbh with an investment of over Rs. 60.0 Cr. Cipla has introduced CFC-free environmental friendly inhalers for the first time in India. Two of the company’s inhalers namely Asthalin and Budecort have sales of over Rs. 30.0 Cr. and Rs. 20.0 Cr. respectively. We expect the company to become a leading global player in the inhaler segment due to the economies of scale.

The current market price of Rs.1092 discounts the estimated annualised FY02 EPS of Rs.29.6 by 36.9X. Though this valuation is high as compared to its peers, the scrip provides potential for capital appreciation in the medium term.

Cipla has a bright future in the domestic market since it offers the entire range of generic products. On the export front, the company has achieved 64% growth during the quarter. The results in the quarter are affected by one-time extraordinary expense of AIDS awareness campaign and Deferred tax liability. With the healthy 23% top line growth (thrice compared to the market growth) and huge export potential in the anti-AIDS segment, Cipla scrip will remain attractive among the investors.

We believe, Cipla’s premium valuations are there with a reason and it is more or less performing on expectations. The current results should not be taken negatively. Infact, any abnormal fall in the current price could be used as an opportunity to accumulate.

             Last Price :     Rs. 1070       

             13 day EMA :     Rs  1087

             50 day EMA :     Rs. 1092

             200 day EMA :   Rs.  1041

             Support        :   Rs. 1051

             Resistance  :     Rs. 1170

• The scrip is currently quoting below the 13 day EMA . The scrip is currently placed near the oversold zone , thus the scrip is expected to witness an upmove from the current levels. The volumes witnessed by the scrip is between 30-40 thousand shares.
• It has its 50 day EMA at 1092 ,past which the scrip turns bullish . The MACD indicator is currently in the SELL mode . The  24 day MACD indicator has penetrated downwards below the zero levels today. Thus the scrip is required for an immediate   uptrend from the current levels to give a BUY trigger. The scrip has a support at 1051 , below which the scrip takes support at 1041 that is the 200 day EMA levels. On the upper side the scrip has a resistance at 1139 past which the resistance lies at 1170 levels.