Initiating Coverage - Cadila Healthcare - Gearing for the next leap

PINC Research initiates coverage on Cadila Healthcare (Cadila) with an Accumulate rating as we believe the stock price correction of 17% in the last 6 months is unwarranted. Going ahead, we expect pick-up in the domestic business including Zydus Wellness (ZWL) which should help the company boost its margins. The Moraiya facility is expected to be cleared in H2FY13, leading to a flow of product approvals for the company. Overall, we estimate Cadila's revenues and net profit to clock a CAGR of 16.3% and 29.3% respectively over FY12-14E. We expect operating margins to improve by 234bps over FY12-14E on back of pick-up in sales, which in turn would negate the impact of increase in the interest cost.

Higher domestic formulation contribution to PAT

The domestic formulation business is estimated to clock a CAGR of 19.7% over FY12-14E to Rs27.1bn driven by the Biochem acquisition. Ex-Biochem, we expect the growth at 13.9% over the stated period led by CV, GI, respiratory and female healthcare segments. Cadila has sheltered the domestic formulation business under partnership firm, resulting in lower tax rate for the company for the domestic formulation segment and higher net margins.

ZWL betting on consumption

ZWL's revenue growth is expected to pick up from FY13E as the company has started production in its new facility at Sikkim (registered under partnership firm) and is also likely to increase its ad spends especially on Sugarfree and re-positioning of EverYuth brands.

Moraiya facility clearance likely in FY13

The re-inspection of Moraiya injectable unit is likely to be done in Q4FY12. We expect the facility to be cleared by H2FY13. This would pave way for the launch of sterile injectables as well as the finished dosage products that are pending approval from the facility. As a result, we expect US sales to grow at a CAGR of 18.3% over FY12-14E to Rs 17.3bn.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 16.6x and 13.1x its FY13E and FY14E earnings respectively. We value the stock at 18x one year forward earnings which is at a discount of 18% to large peers given the scale. We initiate coverage on the stock with an ACCUMULATE rating and a Target Price of Rs751.

Source : Equity Bulls

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