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Cadila Healthcare’s (CHL) FY11 annual report analysis highlights a
significant proportion of standalone profitability arising out of share of
income from partnership firms. Prudent use of partnership structure led
to lower tax rate.
Other operating income drives standalone profitability
CHL’s (standalone) operating income grew 20.4% to INR 29.2 bn in FY11 from INR 24.3
bn in FY10, including other operating income of INR 7.4 bn (FY10: INR 5.9 bn), which
primarily consists of:
1. Share from a partnership firm of INR 5.8 bn (FY10: INR 4.6 bn).
2. Miscellaneous income of INR 1.5 bn (FY10: INR 1.3 bn).
3. Foreign exchange gain of INR 0.1 bn (FY10: Nil).
Adjusted for share from the partnership firm, FY11 EBIDTA margin stood at 5.3% (FY10:
7.5%).
Tax efficient structure leads to lower tax rate
The company, on consolidated basis, has a low effective tax rate of 11.9% (FY10:
10.7%), primarily on account of certain manufacturing operations being housed in two
partnership firms. These firms not only enjoy income tax incentives for backward areas,
but are also outside the ambit of MAT and hence better placed in terms of cash outflow
for tax than peers.
Substantial surge in debtors puts pressure on operating cash flow
CHL reported operating cash flow post interest of INR 6.1 bn vis‐à‐vis PBT of INR 8.4 bn
primarily on account of increase in working capital led by debtors.
The company’s debtors grew 63.9% from INR 4.7 bn in FY10 to INR 7.7 bn in FY11,
which also includes INR 1.3 bn from joint venture, primarily on account of sale of Doce
Texal in the previous quarter. Debtors as % sales at FY11 –end stood at 16.5% (FY10:
12.7%).
CHL’s creditors also stood high at INR 8.3 bn (FY10: INR 6.2 bn), 48.6% of COGS (FY10:
44.8%).
Other highlights
Derivative position for standalone entity in respect of currency forwards/options
jumped significantly from INR 1 bn in FY10 to INR 4.4 bn in FY11 in respect of exports.
INR depreciation may result in MTM loss on derivatives (exports may provide cushion).
Managing director remuneration for FY11 stood at INR 388 mn (4.6% of PBT).
Goodwill and intangible assets as at FY11 end stood at INR 5.7 bn, 26% of net worth.
Profitability analysis (ROAE analyser)
ROAE analyser analyses profitability on the scale of operating efficiency and capital
allocation efficiency (detailed concept explained in Annexure A). We have analysed CHL’s
profitability for years ended FY09, FY10 and FY11.
Annexure A – ROE analyzer
ROE analyser analyses the profitability on the scale of operating efficiency and capital
allocation efficiency. While operating efficiency is a measure of how efficiently the company
is making use of operating assets, capital efficiency is the measure of balance sheet
efficiency.
The above analysis involves:
1. Dissection of profitability along two major drivers:
a. Return from operating activities (RNOA: return on net operating assets).
b. Return from financing activities (leveraging effect on ROE).
ROE = Return from operating activities (RNOA) + Return from leverage
Or
ROE = Operating margin x Operating assets turnover + Leverage spread x Leverage
multiplier
Whereas:
RNOA = NOPAT/Average operating assets
Operating margin = NOPAT/Operating revenue
Operating assets turnover = Operating revenue/Average operating assets
Leverage spread = RNOA – Net borrowing cost
Leverage multiplier = Average net financial obligation/Average common shareholders’
equity
2. Reformulation of balance sheet, wherein we have regrouped assets and liabilities into
operating and financing categories (against traditional current and non‐current
categorisation).
3. Reformulation of income statement, wherein we have regrouped income and expenses
into operating and financing activities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cadila Healthcare’s (CHL) FY11 annual report analysis highlights a
significant proportion of standalone profitability arising out of share of
income from partnership firms. Prudent use of partnership structure led
to lower tax rate.
Other operating income drives standalone profitability
CHL’s (standalone) operating income grew 20.4% to INR 29.2 bn in FY11 from INR 24.3
bn in FY10, including other operating income of INR 7.4 bn (FY10: INR 5.9 bn), which
primarily consists of:
1. Share from a partnership firm of INR 5.8 bn (FY10: INR 4.6 bn).
2. Miscellaneous income of INR 1.5 bn (FY10: INR 1.3 bn).
3. Foreign exchange gain of INR 0.1 bn (FY10: Nil).
Adjusted for share from the partnership firm, FY11 EBIDTA margin stood at 5.3% (FY10:
7.5%).
Tax efficient structure leads to lower tax rate
The company, on consolidated basis, has a low effective tax rate of 11.9% (FY10:
10.7%), primarily on account of certain manufacturing operations being housed in two
partnership firms. These firms not only enjoy income tax incentives for backward areas,
but are also outside the ambit of MAT and hence better placed in terms of cash outflow
for tax than peers.
Substantial surge in debtors puts pressure on operating cash flow
CHL reported operating cash flow post interest of INR 6.1 bn vis‐à‐vis PBT of INR 8.4 bn
primarily on account of increase in working capital led by debtors.
The company’s debtors grew 63.9% from INR 4.7 bn in FY10 to INR 7.7 bn in FY11,
which also includes INR 1.3 bn from joint venture, primarily on account of sale of Doce
Texal in the previous quarter. Debtors as % sales at FY11 –end stood at 16.5% (FY10:
12.7%).
CHL’s creditors also stood high at INR 8.3 bn (FY10: INR 6.2 bn), 48.6% of COGS (FY10:
44.8%).
Other highlights
Derivative position for standalone entity in respect of currency forwards/options
jumped significantly from INR 1 bn in FY10 to INR 4.4 bn in FY11 in respect of exports.
INR depreciation may result in MTM loss on derivatives (exports may provide cushion).
Managing director remuneration for FY11 stood at INR 388 mn (4.6% of PBT).
Goodwill and intangible assets as at FY11 end stood at INR 5.7 bn, 26% of net worth.
Profitability analysis (ROAE analyser)
ROAE analyser analyses profitability on the scale of operating efficiency and capital
allocation efficiency (detailed concept explained in Annexure A). We have analysed CHL’s
profitability for years ended FY09, FY10 and FY11.
Annexure A – ROE analyzer
ROE analyser analyses the profitability on the scale of operating efficiency and capital
allocation efficiency. While operating efficiency is a measure of how efficiently the company
is making use of operating assets, capital efficiency is the measure of balance sheet
efficiency.
The above analysis involves:
1. Dissection of profitability along two major drivers:
a. Return from operating activities (RNOA: return on net operating assets).
b. Return from financing activities (leveraging effect on ROE).
ROE = Return from operating activities (RNOA) + Return from leverage
Or
ROE = Operating margin x Operating assets turnover + Leverage spread x Leverage
multiplier
Whereas:
RNOA = NOPAT/Average operating assets
Operating margin = NOPAT/Operating revenue
Operating assets turnover = Operating revenue/Average operating assets
Leverage spread = RNOA – Net borrowing cost
Leverage multiplier = Average net financial obligation/Average common shareholders’
equity
2. Reformulation of balance sheet, wherein we have regrouped assets and liabilities into
operating and financing categories (against traditional current and non‐current
categorisation).
3. Reformulation of income statement, wherein we have regrouped income and expenses
into operating and financing activities.
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