Total expenditure has gone up a whopping 82.4 per cent to Rs 7,062 crore. High cost of feedstock was the reason. The company could not pass on the entire increase in feedstock cost to consumers as is borne out by a lower topline growth of 73.6 per cent to Rs 8,394 crore. However, economies of scale shored up operating profit by 38.2 per cent to Rs 1,332 crore. Yet, operating profit margin (OPM) has pared down to 15.9 per cent from 19.9 per cent.

Then, there is the fact that the company has netted off foreign exchange fluctuation gain on remittance of external commercial borrowing (ECB) proceeds amounting to Rs 170 crore against total expenditure. This means, indirectly, the same is treated as income from operations. There are no specific guidelines for treatment of this kind of income. It is also not clear as to why it has been treated as such when it is purely a treasury operation.

Precisely, for this reason, profit as per US GAAP is lower than the profit as per Indian accounting practices. At best, the company has put its accounting acumen to good use. The disclosure of this extraordinary item may not be a statutory requirement, but the company would have done well to disclose this fact as the total expenditure item. Therefore, total expenditure is not strictly comparable with that in the corresponding quarter of the last year.

If the said gain is excluded from operating income, profits and profitability would be lower. In that case, the growth in operating profit would have been 20.5 per cent and the fall in OPM, more than 6 percentage points. Exports made on behalf of Reliance Petroleum must also have helped in shoring up margins.

Higher working capital requirement was the result of increasing crude oil prices. Consequently, interest has gone up by 39 per cent to Rs 333 crore.

Net profit growth at 20 per cent to Rs 735 crore looks reasonable. However, growth of net profit would have been mere 7.8 per cent, had it not been for the change in method of providing depreciation. Depreciation for the quarter is lower by about Rs 75 crore as the company changed the basis of providing depreciation to written down value (WDV) from straight line method (SLM).

RIL may have to face stiff competition from the West Asian and Far East Asian countries that are building up new polymer capacities over the next two years. This is likely to squeeze margins apart from compounding problems in the polyester yarn market.

The company has relied on acquisitions to gain some pricing leverage in this segment. Crude oil prices have gone up but polyester yarn prices have remained stable. Saloman Smith Barney, the Equity Research firm projects that the downturn in petrochemicals will be short-lived and demand will rebound from 2002. As regards polyester market, it is likely to look up shortly. This may explain why the stock is hovering around Rs 300.

Furthermore, the fear of suffering loss has restrained operators from going short as the buy-back price is Rs 303.

Cipla Cipla's results for the second quarter ended September 2000 are upbeat and in tune with the current trend of the pharma companies doing well. Cipla is a leader in the anti-asthmatic and anti-infective therapeutic segments that account for a bulk of sales revenue that rose by 35 per cent to Rs 270 crore (Rs 200 crore). The growth has been vastly better than 23 per cent clocked in the last fiscal and in the previous quarter to June 2000.

Cipla is one of the few and the earliest Indian pharma companies to have cottoned onto R&D that led to the development of better products coupled with cost competitiveness and improved bottomline. Cipla was the pioneer in the development of CFC free anti-asthma inhaler, which, according to analysts has a $1 billion market in the US and Europe.

It is also working on the development of two chiral drugs ( drugs without side effects) - RR formoterol (an anti-asthmatic) and levocetirizine (an anti-allergic). Sales income and the bottomline will get a big boost after completion of the process.

Cipla may also benefit from its emphasis on manufacture of generic products. However, the WTO norms may have serious implications for the company particularly after the post-patent regime comes into effect from 2005.

Thereafter, the new molecules will become prohibitively expensive to produce and R&D in low gear may not exactly release sustainable flow of new products yielding high margins.

Cipla may have to take note of these factors in its future strategy. It has another option i.e. to capture the generics market where it would face competition from other Indian pharmaceutical as well as multinational companies.

Cipla's operating costs up 33 per cent to Rs 206 crore have moved in tandem with the growth of sales revenue. Net profit as a result has gone up by 45 per cent to Rs 52 crore (Rs 36 crore). Cipla scrip quotes at around half its 52 week high of Rs 1,650. The share price flared up following the announcement of the results cross the Rs 900 mark. The outlook for the stock remains stable at current levels and the success of the new initiatives taken by the company could see a re-rating of the company which would trigger a significant upward movement in its share price.

Manish Joshi and Prashant Kothari