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Cadila Healthcare – 3QFY2011 Result Update
Angel Broking maintains a Neutral view on Cadila Healthcare.
Cadila Healthcare (Cadila) reported slightly lower-than-expected results for
3QFY2011. The company maintained its top-line guidance of US $1bn, implying
27–28% yoy growth, with OPM improvement of 100bp from 19.5% in FY2010 to
20.5% in FY2011. The stock is trading at 25.9x FY2011E and 20.0x FY2012E
earnings. We maintain our Neutral view on the stock at these levels.
Results slightly below expectations: Cadila reported net sales of `1,135cr, up
17.5% yoy and slightly lower than our estimates of `1,143cr, driven by the
domestic, US, North America and Latin America formulation segments. On the
domestic front, net sales grew strongly by 17% to `558.8cr (`479.1cr). OPM grew
to 19.7% (19.1%), lower than our estimates. This was despite a 52.2% increase in
R&D expenses to `52.8cr (6% of sales) vis-à-vis `34.7cr (3.6% of sales) during the
last corresponding period. Net profit increased by 24.9% to `162cr (`130cr),
lower than our estimates of `173cr on the back of higher tax outgo of 17.8% of
PBT vis-à-vis estimated 12.0% of PBT.
Outlook and valuation: We expect net sales to post a 19.4% CAGR to `5,100cr
and EPS to report a 26.6% CAGR to `39.6 over FY2010–12E. We maintain our
Neutral view on the stock at these levels.
Revenue up 17.5%, slightly below estimates: Cadila reported net sales of `1,135cr
(`965cr), up 17.5% and below our estimates of `1,143cr, driven by the domestic,
US, North America and Latin America formulation segments.
On the export front, the US business grew by 33% to `237cr (`178cr), mainly
driven by expansion of market share in existing products. The company has so far
launched 39 products in the US market. During the quarter, Cadila filed three
ANDAs, taking its cumulative ANDA pending approvals to 118; and received
approval for one ANDA in the US, taking total approvals to 59. The company
expects to launch 8–10 products in the US in FY2011. In Europe, sales declined by
15% yoy to `88cr (`104cr), and the company filed four dossiers for new products,
taking cumulative filings to 102. Further, in Japan, sales grew by 21% to `11cr
(`8.8cr), and the company launched Rabeprazole and Glimeperide, which were
day-one launches in these markets. On the API front, the company’s sales grew by
16% to `91cr (`78.5cr).
On the domestic front, strong growth continued with net sales growth of 17% to
`559cr (`479cr). Cadila launched nine new products, including line extensions
and Ostigard 100, the first Indian launch during the quarter. Currently, the
company has a strong field force of 4,500MRs. The company expects strong
traction on the domestic front to continue during FY2011. In the consumer
healthcare division, Cadila continued to post healthy top-line growth of 21% in
3QFY2011.
On the CRAMS front, the Nycomed joint venture (JV) generated sales of `15cr
(`7.2cr), reporting an increase of 103% yoy. The company is well on track to
commence supplying 14 APIs (eight under the Nycomed JV and six under Cadila)
by 1QFY2012-end. On the other hand, the Hospira JV reported sales of `37cr
(`18.6cr), up 97%, during the quarter.
OPM expands on the back of a favourable product mix: During the quarter,
Cadila posted flat gross margins of 68.5%. On the operating front, OPM grew to
19.7% (19.1%) on the back of 10.5% growth in other expenses to `358.6cr
(`324.6cr), despite a 52.2% increase in R&D expenses to `52.8cr (6% of sales) v/s
`34.7cr (3.6% of sales) during the last corresponding period.
Net profit grew by 25%: Net profit for the quarter came in at `162cr (`130cr), up
24.9%, lower than our estimates of `173cr on the back of higher tax outgo of
17.8% of PBT vis-à-vis estimated 12.0% of PBT during the period.
Concall takeaways
�� On the research front, ZY01, the novel GLP-1 agonist designed and
developed at the Zydus Research Centre, completed Phase I clinical trials and
showed favourable results.
�� Management expects revenue from the Abbott deal to flow in from the next
financial year.
�� Going forward, management expects sales from the Nycomed JV to decline
from 4QFY2011 due to the patent expiry of its key product Pantaprazole. The
API supplies for other products in the JV are expected from 2QFY2012.
�� In the biologicals space, Cadila currently has a kitty of seven products, of
which five have been approved by Indian regulatory authorities and are on
their way to be launched. The company targets to have 10 products market
over the next 4–5 years.
�� Cadila is expanding its presence in the vaccine business. The company plans
to invest `250cr–300cr over the next 2–3 years.
�� Cadila has maintained its FY2011 revenue target of US $1bn and has
re-affirmed its guidance of US $3bn by FY2015–16, implying a CAGR of 25%.
Recommendation rationale
Strong domestic portfolio: Cadila is the fifth largest player in the domestic market
with sales of about `1,445cr in FY2010, contributing 40% to its top line. The
company enjoys leadership position in the CVS, GI, women healthcare and
respiratory segments, with a sales force of 4,500. The company, on an aggressive
front, launched more than 60 new products, including line extensions, in FY2010.
During FY2008–10, the company reported a 10.8% CAGR in its top line in the
domestic formulation business. Going forward, the company expects the segment
to grow at above-industry average of 12–14% on the back of new product
launches and field force expansion. Further, the company has a strong consumer
division through its stake in Zydus Wellness, which has premium brands, such as
Sugarfree, Everyuth and Nutralite, under its umbrella, which reported a top-line
CAGR of 31.8% to `267.5cr over FY2008–10.
Exports on a strong footing: Cadila has a two-fold focus on exports, wherein it is
targeting developed as well as emerging markets, which contributed around 48%
to its FY2010 top line. The company has developed a formidable presence in the
developed markets of US, Europe (France and Spain) and Japan. In the US, the
company achieved critical scale of US $140mn on the sales front in FY2010, with
40% of its products commanding a market share of more than 20%. This was
primarily driven by market share gains in the US, as some key competitors had
manufacturing constraints due to the USFDA issue. In Europe, the company’s
growth going forward would be driven by new product launches and improvement
in margins by product transfer to Indian facilities. In emerging markets, Cadila is
aggressively targeting Brazil and the CIS region.
One of the most profitable CRAMS players: Cadila’s CRAMS JV with Nycomed and
Hospira is one of the most profitable in the industry, with OPM of more than 50%
and 30%, respectively. Under Nycomed, Cadila expects to commence supply of 14
APIs in the near future. On the Hospira front, where current capacity utilisation is
pegged at 15–20%, the company expects to scale it up further by tapping the US
region in FY2011 from the current European region only.
Outlook and valuation
We expect net sales to post a 19.4% CAGR to `5,100cr and EPS to report a 26.6%
CAGR to `39.6 over FY2010–12E. At current levels, the stock is trading at 25.9x
and 20.0x FY2011E and FY2012E earnings, respectively. We maintain our Neutral
view on the stock.
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