Cadila Healthcare - Steady quarter; Vaccine is the key trigger - ICICI Securities

Cadila Healthcare (Cadila) reported Q3FY21 performance largely in line with our estimates with strong India growth aided by COVID-19 portfolio. Total revenue grew 4.8% to Rs38.0bn (I-Sec: Rs38.5bn) supported by India formulations and consumer businesses. EBITDA margin (ex-forex) improved 270bps to 21.4% (I-Sec: 21.0%) driven by improved gross margin and lower S,G&A expenses. Adjusted PAT increased 46.9% to Rs5.3bn (I-Sec: Rs4.5bn) aided by lower interest cost. The company has strengthened the balance sheet by meaningful net debt reduction to ~Rs38bn, aided by internal accruals and equity raise of Rs10bn in Zydus Wellness (subsidiary). Cadila's potential COVID-19 vaccine 'ZyCoV-D' is progressing well in the phase III trials. Successful launch of this vaccine would provide upside. Maintain HOLD.

- India business was the key growth driver: India formulations business grew 21.2% YoY with recovery in industry growth from COVID-19 impact and launch of Remdesivir for COVID treatment. Consumer wellness business in India also grew strong 15.8% YoY. Animal healthcare grew 17.0% led by strong demand. US revenue dropped 6.2% QoQ to US$214mn due to weak flu season and inventory correction in few products. Ramp-up in transdermal products, injectables and high value launches would help in gradual pick-up in sales. API business segment witnessed a decline of 18.8% YoY on high base. EMs grew 10.9% and Europe business increased 24.3% YoY.

- Margins remain stable: Cadila witnessed 270bps EBITDA margin (ex-forex) improvement on YoY basis to 21.4% (-150bps QoQ). Gross margin improved 100bps YoY (+80bps QoQ) with higher revenue from India business. R&D spend stood at 9.3% of sales vs 8.4% YoY and 7.5% 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 6.4/10.5/17.1% respectively, over FY20-FY23E. We expect the earnings growth would be largely driven by steady margin and reduction in interest expense. The company reduced net debt by ~Rs29bn in 9MFY21 to Rs38bn with better working capital management, lower capex and equity raise in Zydus Wellness. This has strengthened the balance sheet materially.

- Valuations and risks: We marginally revise our estimates to factor in lower US sales and reduced interest cost and maintain HOLD rating on the stock with a revised target of Rs490/share based on 22x FY23E EPS (earlier: Rs476/share based on Sep'22E). Key upside risks: successful launch of COVID-19 vaccine in India and other markets and early resolution of Moraiya facility. 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.473.4 as compared to the previous close of Rs. 475.4. The total number of shares traded during the day was 249693 in over 3652 trades.

The stock hit an intraday high of Rs. 479.85 and intraday low of 472.6. The net turnover during the day was Rs. 118705290.

Source : Equity Bulls

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