Maintain 'buy' on Cadila Health - TP lowered to Rs.817 - Geojit BNP Paribas Financial Services

- Buy rating on Cadila Healthcare is maintained but the target price lowered to Rs.817 from Rs.1052 earlier. The stock is currently traded in the range of Rs.740.

- The company disappointed in 3QFY13 with PAT missing market estimates substantially on the back of a weak operating performance.

- The company is going through a phase in which its growing cost base is not being compensated by proportionate revenues from key markets such as the US and Brazil, leading to a cash flow mismatch and putting pressure on the balance sheet.

- It seems that cash flow mismatch may affect near term operations but is unlikely to be structural. Timely US FDA approvals and subsequent launches in the US, a return to growth in Brazil and steady India operations should improve cash flows and fund capex from 2QFY14.

- EPS estimates for FY13, FY14 and FY15 have been cut by 12%, 19% and 18% respectively on weak 3QFY13 results, higher finance costs and tax rates. As a result, the 12 month TP cut to Rs.817 from Rs.1052 earlier.

- It appears that recent stock correction of 15% suggests that the near term earnings weakness is partly priced in and the stock weakness offers a good entry point.

- It seems that Cadila Health is undergoing a prolonged investment phase and expects the pain to last for at least two more quarters. 3QFY13 was a trough quarter and a gradual recovery is expected from 2QFY14.

- It appears that the company is making investments in the right products and technologies and the long term story is intact.

Source : Equity Bulls

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