Cadila Healthcare Limited - Q3FY14 Update, CMP Rs.976, Rating changed to HOLD, increased Target of Rs.1056 - Sushil Finance

CADILA HEALTHCARE LIMITED - Q3FY14 RESULT UPDATE - CMP Rs.976, Rating changed to HOLD, increased Target of Rs.1056

Cadila Healthcare Limited. (Cadila) reported strong set of numbers in Q3FY14 on the export formulations front led by a 61% growth in US market however disappointed on the domestic formulations front registering a muted growth of 3.4% with issue continuing to persist during the quarter. The following are the key highlights of the results which are summarized below:

Key Highlights of Q3FY14

- Net sales & EBITDA grew by 17% & 16% respectively whereas EBITDA margins came in flat YoY at 15.8% whereas QoQ it grew by 90 bps. PAT grew by 82% (due to lower tax rate of 17% vs 36% in Q3FY13). EPS in Q3FY14 came in at Rs.9.1 vs Rs.5 in Q3FY13. 9MFY14 EPS came in at Rs.27.6 vs our FY14E EPS at Rs.38.8.

- Domestic formulations recorded sluggish growth of 3.4% (sluggish market growth led by NLEM issue - 4% of sales, trade margins issues ongoing, Co. stopped selling 2 products - 3% of sales) with 12 new product launches out of which 2 were first in India. On a like to like basis domestic formulations grew by 10.5%. Management optimistic of growth coming back to 15-20% going forward.

- Export formulations - strong growth seen in US - 61% (led by price increase, Management expects 20+ approvals on a yearly basis, Transdermal launches expected in FY15E, expects significant growth in FY15E with filing rate of 40+ ANDAs in 2014, 9MFY14 filings - 54 out of which 19 are Para IV, Asacol HD approval expected in CY14), Europe (6%) & emerging markets including Mexico (30%, 7 new product launches in different markets). 31 ANDAs filed (3 injectables, 1 Nasal, 4 Topical, Transdermal) & 3 ANDA approvals (injectables) received. The management is confident of exceeding $100mn/quarter run rate in US with increased filings - 40+/year & approvals - 20+/year going forward. In Mexico, the company launched 2 new products during the quarter, taking the cumulative number of launches to 6. JV business (Hospira expected to stabilize with 12 new product launches in FY15E whereas on the Takeda JV front, the co. is already supplying APIs). Cadila exited from Japan on the back of slower than expected revenue ramp up, price cuts every 2 yrs that the co had to take & too huge investments needed to be made by the co for scaling up the business which the co felt was not worth

- Wellness gross sales grew by 2% (Sugarfree doing well. Distribution network restructuring ongoing which is expected to be over by Q4FY14). Growth expected to pick up in Q1FY15. PAT grew by 19% to Rs.193 mn.

- Tax rate guidance at 12-13% for FY14E & 12-15% for FY15E. Gross Debt - Rs.28620 mn with foreign debt at Rs.10860 mn. Outstanding Hedges - $ 26 mn @ ~Rs.62.

OUTLOOK & VALUATION

Post domestic formulation sluggishness witnessed in Q3FY14, we expect this to recover going forward led by resolution of trade related issues. On the export front, with better visibility in the markets such as US (ramp up expected in approval rates from the USFDA, improved filing & launch guidance of 40+ & 20+ respectively over the next 12-15 months in the US, + transdermal launches), JV sales (some more products added under Hospira JV likely be launched in 2015), aggressively targeting emerging markets like Brazil and the CIS region coupled with loss making markets turning around should help accelerate sales and profit growth starting from FY15. We think the worst is more or less over for the company & believe consistency in performance & change in fortunes for the company in FY15 would lead to re-rating in the counter with valuations getting back to historical levels of 19-20x. We have tweaked our FY15E estimates & also introduced FY16E nos. We thereby recommend a HOLD on the stock with a TP of Rs.1056 based on 18x FY16E EPS of Rs.58.7 with any correction in the stock going forward seen as a good opportunity to accumulate for the long term.

Source : Equity Bulls

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