Visit http://indiaer.blogspot.com/ for complete details CADILA 2QFY11: EBITDA in line; Low forex hedges a risk; Expect 23% EPS CAGR led by formulation exports
- Cadila's (CDH IN, CMP Rs682, Mkt Cap US$3.1b, Buy) 2QFY11 operational performance was in line with revenue growth of 18% YoY to Rs11.2b (v/s est Rs10.7b) and Adj PAT growth of 27% YoY to Rs1.7b (vs est Rs1.53b). Topline growth was led by formulation exports (up 34.9% YoY) on the back of strong growth in North America (up 40.8% YoY), Latin America (up 26.7% YoY) and emerging markets (up 43% YoY).
- While domestic formulations revenue grew by 18.6% YoY to Rs4.7b partially boosted by low sales in 4QFY10 (impacted due to VAT implementation in certain states), Consumer and others business grew 21.4% YoY to Rs1.2b.
- The growth momentum in exports to US continued with revenues recording 40.8% YoY growth led by new launches and market share gains in existing products. Exports to Europe were up 11.3% YoY at Rs632m partially impacted by Euro depreciation versus INR. Revenue from Hospira JV grew 53.8% YoY to Rs312m.
- API exports declined by 7.1% YoY to Rs965m primarily due to 21.4% YoY decline in supplies to Nycomed partly impacting topline growth.
- EBITDA was in line with estimates at Rs2.44b (up 19% YoY) while EBITDA margin was up 20bp at 21.9% (vs est 22.9%). EBITDA margin was partially impacted by adverse currency movements.
- Adjusted PAT was above estimates due to lower interest and depreciation charges and lower tax outgo.
New launches to drive growth in US market
- Cadila has a pipeline of 57 ANDAs pending approval and has received 58 ANDA approvals till date (including tentative approvals). It expects to file about 10-15 ANDAs with the US FDA every year and get about 8-10 approvals per year.
- Cadila’s US business is witnessing increased traction due to absence of some of the competitors (due to US FDA issues) and new product launches. We expect the company to record US$198m sales in FY11E compared to US$142m for FY10. We expect this business to grow at 23% CAGR for FY10-12 period despite an appreciating currency.
- Cadila has also commenced development and filing of potential low-competition products with delivery advantages (for e.g., transdermal patches and respiratory products) and is focusing on developing a pipeline of such niche products (likely to be commercialized post FY12).
Hospira supplies to ramp up from 2HFY11E
- Cadila’s supplies to Hospira have commenced in FY10 recording Rs839m in revenues for supplies to Europe. We expect ramp-up in this business in 2HFY11 led by commercialization of more products and commencement of supplies to the US.
- Cadila has reported revenues of Rs451m to Hospira for 1HFY11 while we expect full-year revenues of Rs1.15b and Rs1.78b from this partnership for FY11 and FY12, respectively.
Domestic branded business – likely to grow in double digits led by new product launches
- Post correction in distribution channel undertaken in FY09 (which impacted growth temporarily), Cadila’s growth in the domestic formulations business recovered partly in FY10 recording 12.2% growth which was still lower than the average industry growth of ~17%. For 1HFY11, it has recorded 18% growth.
- We believe that a ramp-up in growth of this business is imperative to support the company’s initiatives in other markets as it is a high cash generating business.
- During the quarter the company launched 10 new products in the domestic formulations market.
- Management has, in the past, guided for 15% growth for this business in FY11. The company expects to launch 45 new products for this business in FY11.
Consumer business continues to record strong growth
- Cadila’s consumer business (7.5% of overall revenues) enjoys leadership position in niche consumer healthcare segments of sugar substitute, butter substitute and facial care. This business has been growing rapidly on the back of strong growth in respective product categories along with dominant market share in these segments (more than 50% market share).
- The company recorded 37% growth for this business in FY10 while 1HFY11 growth was 29.6%. We expect 26% CAGR in revenues over FY10-12.
Forex hedges close to nil – exposed to currency appreciation
- Management has indicated that current forex hedges are only ~US$3m. It has taken a view of not entering into new hedges since the INR/US$ movement has been volatile in the past.
- Any major currency appreciation is likely to adversely impact Cadila’s financials since ~35-40% of its revenues are in US$ while US$-denominated expenses (natural hedge) are not very high due to lower import content.
Outlook
- Cadila’s future growth will be led by increased traction in its international businesses, ramp-up in supplies to Hospira and recovery in domestic formulations business. This coupled with a de-risked business model should ensure good long-term potential for the company.
- We estimate 17.3% revenue and 23% earnings CAGR for FY10-12 led by 23% CAGR for the US operations and 26% CAGR in the domestic consumer revenues coupled with ramp-up in supplies to Hospira. We expect RoE of more than 30% over the next two years.
- We forecast EPS of Rs29.6 for FY11 (up 19%) and Rs37.6 for FY12 (up 27%) implying 23% EPS CAGR over FY10-12.
- Cadila is currently valued at 23x FY11E and 18x FY12E consolidated earnings. Our estimates do not include any upsides from the supply agreement with Abbott.
- Maintain Buy with a target price of Rs714 (19x FY12E).
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