Cadila Healthcare - Margin Disappoints; Expect Improvement - ENAM Direct

Cadila Healthcare reported Q2FY13 revenue of Rs 15 bn (up 25% YoY), in line with our estimate. Gross margin at 67% (vs. estimate of 69%) declined 120 bps YoY due to lower Brazil sales (strike at Anvisa - Brazil's drug regulator; expected to normalize Q3 onwards). Consequently, adj. PAT (excl. forex loss of Rs 757 mn) of Rs 1.7 bn (down 6% YoY) was below our estimate of Rs 2.1 bn.

We believe normalized operations in Brazil from Q3, higher export realization (only USD 19 mn of forward hedges taken at ~Rs 50 are outstanding), and US product launches will improve gross margin in subsequent quarters.

Moraiya facility begins US supply: In Q2, Cadila received 10 ANDA approvals (5 for injectables). Also, Moraiya begun supplying 3 products to US (in last week of Sep '12); expects to add 3 more in Q3. Nesher would launch 1 product in Q3. More US launches likely Q4FY13 onwards.

Q2 highlights: Domestic formulations (ex-Biochem) grew 18% YoY led by product launches (15 in Q2). US revenue growth was flat (USD terms) as no products were launched. Latam declined 26% YoY due to strike at Anvisa. Emerging Markets grew 76% driven by product launches and Moraiya supply (categorized under EM sales). EBITDA margin was down 334 bps YoY to 19% (our est. 22%) due to higher R&D (7.6% vs. 6.9% in Q2FY12) and lower gross margin.

Maintain BUY with TP of Rs 1,012 (18% upside)

Sustained high growth in domestic formulations (ex-Biochem 17% YoY in H1), beginning of ANDA approval process, and higher realization on exports will help Cadila post 19% revenue CAGR over FY12-14E. Maintain BUY with target price of Rs 1,012 (20x FY14E EPS). Potential cost-based domestic pricing policy is a risk.

Source : Equity Bulls

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