Cipla's third quarter performance has been somewhat disappointing. The company reported a 12 per cent growth in sales to Rs 1,501 crore over the corresponding quarter last year. However, profits for the quarter dipped by 20 per cent to Rs 233 crore, driven largely by lower technology income, higher overhead costs and depreciation due to the commissioning of the new manufacturing facility at Indore SEZ.

The high-margin technology income fell by 78 per cent to Rs 15 crore in the quarter. Though technology income tends to be lumpy, the significant drop in it added with the cost burden of the new facility pushed the company's operating margins down to 20.5 per cent from 26.4 per cent seen last year.

For the nine-months ended December 2010, the company reported 11.6 per cent growth in revenues while profits fell by about 7 per cent. Operating profit margins at 22.3 per cent contracted by 3.6 percentage points, while tech fee at Rs 43 crore came in 71 per cent lower than that seen last year.

Segment sales

Domestic sales for the quarter grew by about 11 per cent during the quarter. This was somewhat lower than expected as the winter quarter typically is good for Cipla given its strong franchise in the anti-asthma products.

Exports registered a 12 per cent growth, with formulations registering 12 per cent growth and APIs by 13 per cent.

Note that the management had earlier guided 8-10 per cent growth in its overall revenues for FY11. It expected a 10-12 per cent growth in exports and 10 per cent in domestic business. The management had guided for a fall in its technical fee contribution to Rs 75-100 crore.

While the company's performance in the nine months to December 2010 has largely been in line with the guidance, as far as domestic and export businesses are concerned, it may fall short on the tech income expectations. It has so far only reported Rs 43 crore as tech fees.

Future triggers

Launch of combination inhalers in the European Union (subject to approval) and commencement of API supplies to Teva for Zyprexa's 180-day exclusivity are the key revenue triggers for Cipla from hereon.

Approvals from the developed markets regulators such as UK MHRA and US FDA for its new SEZ facility at Indore (expected within the 1-2 years) would also be a key positive development.

The facility is expected to add to the company's exports in the long-term, as it has significant capacity to manufacture products such as aerosols, nasal sprays, eye drops and even tablets and capsules. Closure of long-term supply agreements with MNC pharma majors too would be a revenue trigger to watch out for.

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