Cadila Healthcare - Margin supported by lower R&D - ICICI Securities

Cadila Healthcare (Cadila) reported Q4FY21 performance largely in line with our estimates. However, US sales were weak while EBITDA margin was supported by reduced expenditure towards R&D. Total revenue grew 3.2% to Rs38.5bn (I-Sec: Rs37.8bn) supported by India formulations and consumer businesses. EBITDA margin (ex-forex) improved 170bps to 22.2% (I-Sec: 22.0%) driven by lower R&D spend (-19.0% YoY). Adjusted PAT declined 2.8% to Rs4.1bn (I-Sec: Rs4.5bn) due to negative other income. The company has strengthened the balance sheet by substantial net debt reduction to ~Rs35bn, aided by internal accruals and equity raise of Rs10bn in Zydus Wellness (subsidiary). Cadila's potential COVID-19 vaccine 'ZyCoV-D' remains the near term trigger, if approved, but we believe current price already captures the potential upside. Maintain Sell.

- India business strong, US weak: India formulations business grew 14.7% YoY with recovery in industry growth from COVID-19 impact and low base of Q4FY20. Consumer wellness business in India also grew strong 22.1% YoY. US revenue dropped 4.6% QoQ to US$204mn due to weak flu season and pressure seen in some key products including Asacol HD. Ramp-up in transdermal products, injectables and high value launches would help in gradual pick-up in sales but USFDA resolution on Moraiya facility remains critical. API business segment witnessed a growth of 19.9% YoY. EMs grew 45.5% on a low base.

- Margins supported by lower R&D: Cadila witnessed 170bps EBITDA margin (ex-forex) improvement on YoY basis to 22.2% (+80bps QoQ). However, gross margin dropped 80bps YoY (-120bps QoQ) despite strong growth in US. R&D expenditure declined 19.0% YoY (-34.1% QoQ) and stood at 6.1% of sales vs 7.8% YoY (9.3% QoQ). We expect the margin to remain stable at ~21-22% over FY22E-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 5.1/3.8/4.1% respectively, over FY21-FY23E. Lower earnings growth is due to rise in S,G&A expenses, though interest cost should be reducing. The company reduced net debt by ~Rs32bn in FY21 to ~Rs35bn which would reduce further after completing the divestment of animal health business. The COVID-19 vaccine data points are expected in coming weeks and successful approval could provide upside in near term.

- Valuations and risks: We marginally revise our estimates to factor in divestment of animal health business. We believe potential of the base business remains weak with only 4.1% EPS CAGR and potential upside from vaccines already factored in the price. Maintain SELL with a revised target of Rs512/share based on 22xFY23E EPS and an NPV of Rs26/share for COVID-19 vaccines (earlier: Rs490/share). Key upside risks: prolonged use of COVID-19 vaccine with higher quantities and early resolution of Moraiya facility.

Shares of CADILA HEALTHCARE LTD. was last trading in BSE at Rs.621.25 as compared to the previous close of Rs. 626.7. The total number of shares traded during the day was 336904 in over 8038 trades.

The stock hit an intraday high of Rs. 628.1 and intraday low of 612.65. The net turnover during the day was Rs. 208823261.

Source : Equity Bulls

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