Cadila Healthcare - Upgrade led by improving US sales & focus on profitability - Phillip Capital

Cadila Healthcare (Cadila) reported better than expected core operating performance with sales and adj. earnings outpacing our estimates by 10% and 43% respectively in Q3FY14. Even the core EBITDA margins were ahead of our expectations at 18.1% (v/s our est. of 15.3%) primarily led by strong recovery in US generic performance (with 61% YoY rise & 33% QoQ growth). Going ahead, we expect Cadila's strong recovery in US operation, rapid progress in ANDA fillings (with 54 in CY2013 and guides >40 in CY14) and likely progress in domestic business Q1FY15 onwards to sustain growth momentum in near future. More importantly, Cadila's recent focus on profitability either by exiting from loss making the Japanese operation or rationalizing loss making products in Europe to drive value growth for the company in the near future. Hence, we upgrade our rating on Cadila from Neutral to BUY with a revised target price Rs 1020 (19x FY16 EPS).

Q3FY14 Results: Strong operating performance

Surprising 61% jump in US generics drive growth: Cadila reported 18.1% growth in sales to Rs 18.93bn, primarily led by healthy 61% jump in US sales (42% growth in terms of constant currency). The domestic formulation saw muted 3% growth.

EBIDTA margin expanded by 320bps to 18.5%; a beat of 320bps over our est: The operating margin saw 3200bps expansion to 18.5%. We believe the margin performance was largely due to the strong performance in its US generic operation which saw a sequential growth of 33% during the quarter. The core EBITDA (Adj. for forex) saw 42% jump to Rs 3.51bn, which was 33% higher than our estimate at Rs 2.63bn.

APAT was 43% ahead of our expectations: The reported PAT saw 81% YoY growth on account of strong revenue and margin expansion despite a forex loss of Rs 380mn. However, the Adj. PAT grew 78% YOY to Rs 2.19bn, which was 43% ahead of our expectations

Key Highlights of Concall:

1) Cadila launched Lansoprazole DR capsules in the US market during the quarter, which coupled with Divalproex ER (launched in Sep 2013) led to 33% QOQ growth in US generic sales in Q3.

2) It filed 31 additional ANDAs with the US FDA including three injectables, one nasal, four topicals and two transdermals drugs. The cumulative US fillings for CY13 stand at 54 ANDAs. Also the management guides for >40 ANDA filling in CY14.

3) It expects the launch of Cymbalta generic in Q4FY14, Toprol generic in Q2FY15 and one strength of mesalamine during H2FY15.

4) Cadila management believes the combine operation of its multiple JVs has already bottomed out both in terms of revenue and profit performance and expects steady progress in the subsequent quarters led by 12 new product addition to Hospira JV and recently commenced new API supply to its Takeda JV.

Source : Equity Bulls

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