Cadila Healthcare - Strong quarter, deleveraging provides comfort - ICICI Securities

Cadila Healthcare (Cadila) reported strong Q2FY21 performance driven by growth across segments along with improving margin profile. Total revenue grew 14.0% to Rs38.3bn (I-Sec: Rs35.9bn) driven by healthy growth in India and US. EBITDA margin (ex-forex) improved 420bps to 22.9% (I-Sec: 20.3%) driven by lower expenses. Adjusted PAT increased 85.2% to Rs5.9bn (I-Sec: Rs4.0bn). The company has reduced net debt by ~Rs27bn in H1FY21 to Rs40.3bn, aided by internal accruals of Rs17bn and equity raise of Rs10bn in Zydus Wellness (subsidiary). We consider it as a highly positive development as Net debt to EBITDA has come down to comfortable level of ~1.3x. We believe revenue mix would continue to improve with higher contribution from India (incl. consumer business of consumer wellness) and US. Upgrade to BUY.

- Revenue growth across segments: US revenue grew 5.3% QoQ to US$228mn led by six new launches during the quarter coupled with traction in base portfolio. Ramp-up in transdermal products, injectables and high value launches would help in gradual pick-up in sales. India formulations business grew 11.2% YoY recovering from COVID-19 impact with easing of lockdown and launch of Remdesivir. The rationalisation of product portfolio for better profitability and effective inventory levels is already complete, which has started yielding results in terms of growth recovery. Consumer wellness business grew 5.7%. Animal healthcare grew 19.5% led by strong demand. API business segment witnessed a strong growth of 52.2% YoY and 22.0% QoQ led by strong global demand.

- Margins remain stable: Cadila witnessed 420bps EBITDA margin (ex-forex) improvement on YoY basis to 22.9% (+80bps QoQ). Gross margin improved 60bps YoY (flat QoQ) with higher revenue from India and US business. R&D spend stood at 7.5% of sales vs 8.2% YoY and 7.6% QoQ. We expect the margin to remain stable at 21-22% in FY21E-FY23E. Early resolution of Moraiya facility and high-value launches in the US could provide an upside.

- Outlook: We expect revenue/EBITDA/PAT CAGRs of 7.3/11.8/18.3% respectively, over FY20-FY23E. We expect the earnings growth would be largely driven by better margin and reduction in interest expense. The company reduced net debt by ~Rs27bn in H1FY21 with better working capital management, lower capex and equity raise in Zydus Wellness.

- Valuations and risks: We raise revenue/EPS by 0-1/4-6% for FY21-FY23E to factor in better margin and reduction in interest cost. We raise target P/E(x) to 22x from 20x considering leverage reduction to comfortable level and profitability improvement and upgrade the stock to BUY from Add with a revised target of Rs476/share based on 22xSep'22E EPS (earlier: Rs410/share). Key downside risks: Delay in the launch of high-value products and regulatory hurdles.

Shares of CADILA HEALTHCARE LTD. was last trading in BSE at Rs.410.15 as compared to the previous close of Rs. 417.7. The total number of shares traded during the day was 167862 in over 2071 trades.

The stock hit an intraday high of Rs. 423 and intraday low of 405. The net turnover during the day was Rs. 69279761.

Source : Equity Bulls

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