Maintain ADD on Cadila Healthcare - Multiple catalysts ahead, albeit priced in - HDFC Securities

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

Cadila's Q4 results were broadly in line with estimates as subdued performance in the US (-6% QoQ) was offset by healthy growth across markets. The growth visibility for India business remains strong as core portfolio (ex-Covid) has witnessed an improved trajectory, driven by volumes. The potential launch of ZyCov-D (DNA-based vaccine for Covid) is likely to lift the near-term outlook. We value the vaccine opportunity at NPV of INR40/share. R&D investments in vaccines, biosimilars, and NCE/NBEs provide potential upside in terms of monetisation opportunities. We revise our EPS estimate by 8%/7% for FY22/23E to factor in higher growth in India and divestment of animal health business. We increase our target multiple to 22x (from 20x earlier) and revise TP to INR605/sh. Maintain ADD.

In line quarter: Revenue grew by 3% YoY to INR38.5bn as strong growth in India (+15% YoY), EMs (+46% YoY), and Consumer Wellness (+22% YoY, double-digit growth in all brands, volume growth, low base) offset subdued performance in the US (-6% QoQ, weak flu, pricing pressure). EBITDA margin inched up to 22.2% (+16bps YoY, +97bps QoQ), as decline in gross margin (-137bps YoY, -86bps QoQ, product mix) was offset by lower R&D (- 159bps YoY, -320bps QoQ) and other expenses (-144bps YoY, -142bps QoQ, cost savings). Adj. PAT at INR7.5bn was buoyed by DTA of INR3.3bn.

Strong outlook for India business: Cadila's India business grew by 15% YoY vs. 6% for the IPM in Q4, driven by strong volume growth. The specialty portfolio (40%) significantly outperformed the market. The contribution of Covid was negligible in Q4 but it is likely to be significant in Q1FY22. We factor in 13% CAGR for India business for the next two years.

ZyCov-D adds an NPV of INR40/share: Cadila's ZyCov-D (DNA-based vaccine) is undergoing phase III trials. Basis the interim events data which is awaited in 10-15 days, the company is expected to file for EUA. Cadila currently has a capacity of 10mn doses per month. This will be augmented via (a) contract manufacturing and (b) de-bottlenecking of existing capacity, which could potentially increase the supplies to 25-30mn doses per month in the next few months. We assume sale of ~300-360mn doses over FY22-23 at~INR500 (guided for affordable pricing) with EBITDA margins of ~30-35% to arrive at an NPV of INR40/share for this opportunity.

Key call takeaways: (a) Saroglitazar - Phase IIb/III trial for PBC indication might start in Aug, to be filed by end FY23/early FY24, expected launch not before CY25; (b) Trastuzumab - launch could add INR300mn to topline (potential INR500mn); (c) US - injectables business can be scaled up to USD300mn in the medium term; aims for 40+ launches in the US p.a., transdermals approval contingent on Moraiya resolution; (d) net debt - INR 35bn, net debt/EBITDA - 1.06x, R&D - 8% of sales, EBITDA margin - 22%+.

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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