Cadila Healthcare - Q2FY14 Update - Maintain BUY, with a Target of Rs.860 - Sushil Finance

Cadila Healthcare Limited. (Cadila) reported disappointing set of numbers in Q2FY14 on the domestic formulations & margins front, however export formulations reported strong growth. The following are the key highlights of the results which are summarized below:

Key Highlights of Q2FY14

- Net sales & EBITDA up 13% whereas EBITDA margins came in flat YoY at 14.9% whereas QoQ it saw a drop of 260 bps (margin impacted due to low growth & contribution from domestic business, high margin JV business de-growing & exports not realized at higher rate due to hedges amounting to losses). Q1FY14 EBITDA margin at 17.5%. PAT grew by 92.7% (due to MAT credit taken). EPS in Q2FY14 came in at Rs. 9 vs Rs. 4.6 in Q2FY13. H1FY14 EPS at Rs. 18.5 vs our FY14E EPS at Rs. 38.8.

- Domestic formulations recorded sluggish growth of 4.1% (led by NLEM issue & low anti-infective sales, Q3FY14 to see the full effect of NLEM, total impact to be around Rs. 750 mn in FY14E) with 19 new product launches out of which 4 were first in India. Cadila launched its pioneering drug Lipaglyn - Diabetes Dyslipidemia in India receiving good response with 1 month sales at Rs. 6 mn with 2500 patients using the drug till now.

- Export formulations recorded a growth of 28.1% led by strong growth seen in US (28.7%) with price increase taken by the company in 7-8% of its portfolio, Europe (23.6%), Brazil (27.7% - Low Base however company continues to face competitive pressure & slow approval process) and emerging markets including Mexico (36.5%, 20 new product launches in different markets) whereas Japan de-grew 8.4%. Cadila filed 12 ANDAs (2 injectables) & received 2 ANDA approvals during the quarter. In the US market, management expects to maintain a filing rate of 25-30 ANDAs/year coupled with 20+ approvals in the next 12-15 months leading to significant growth in FY15E. The company also got its transdermal facility inspected with expectation of 1-2 launches in FY15E. In Mexico, the company launched 3 new products during the quarter, taking the cumulative number of launches to 4 with approvals for 6. JV business de-grew 17.8% (de-growth a timing issue + pricing led decline); however this business is expected to stabilize with new product launches with Hospira.

- Wellness gross sales grew by 7.7% (Sugarfree grew - 44% but Nutralite, Everyuth & Acti-life not doing well). The company expects growth to pick up in Q3 led by increased promotional activities but 20%+ growth expected to take 2 more quarters. EBIDTA margin came in at 26.1% vs 26.9% in Q2FY13. PAT grew by 6.7% to Rs.252 mn.

- Tax rate guidance reduced to 12-13% & 12-15% for FY15E. Capex in H1FY14 at Rs.4170 mn (Rs.1000 mn on account of revaluation of FA). Capex FY14E - Rs.5500 mn. Net Debt - Rs.26760 mn with foreign debt at Rs.11000 mn. Outstanding Hedges - $ 116 mn @ ~Rs.59.

OUTLOOK & VALUATION

Q2FY14 continued being a challenging quarter for Cadila with pressure on margins on account of low growth & contribution from domestic business, high margin JV business de-growing & exports not realized at higher rate due to hedges amounting to losses. However, we believe, the sluggishness in the domestic formulation space is expected to recover with the resolution of trade related issues coupled with better visibility in the export markets such as US (ramp up expected in approval rates from the USFDA, launch guidance improved to 20+ over the next 12-15 months in the US), JV sales (some more products added under Hospira JV likely be launched in 2015), aggressively targeting emerging markets like Brazil and the CIS region. We maintain a BUY rating on the stock with FY15 expected to be a year of change in fortunes for the company with faster approvals in US & domestic market getting back to strong growth.

Source : Equity Bulls

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