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Cadila Healthcare |
Multiple catalyst in pipeline; Raise target price |
ACCUMULATE
CMP: Rs 766 Target Price: Rs 847
n Robust revenue growth (up 18% YoY) and strong operating performance (up 22% YoY) resulted in 28% YoY growth in APAT
n Strong revenue growth was driven by 17% growth in domestic branded formulation business and 33% growth in the US
n Management has re-iterated its revenue guidance of US$1bn for FY11E and domestic growth to sustain at 15% level
n Based on attractive valuations and fair visibility in FY13, we revise the target price upwards to Rs847 (earlier Rs720)
Domestic formulation and US business aided 18% revenue growth
Revenue for the quarter grew in line with our expectations by 18% to Rs11.7bn (we
estimated Rs11.5bn), driven by a) 33% growth in US, b) 33% growth in Latam, c) 97%
growth in Hospira JV, and d) 17% growth in domestic branded formulations. The growth
in the US business was driven by strong uptake in the existing products and launch of
Losartan and derivative, Pramipexole capsules and Ramipril tablets. The domestic
formulation growth was mainly driven by strong growth in chronic segments such as
CVS and respiratory portfolio and introduction of 9 new products. Management has
indicated that the growth in the domestic formulation business is likely to be sustained at
15% level. The Lat Am business was led by 25%+ growth in formulation in Brazil.
Hospira revenues grew by 97% as existing products continued strong momentum
(Sales Rs366mn; PAT Rs209mn). Going forward, company expects much higher
revenues from Hospira JV on the back of new launches in US market. We expect rampup
in Nycomed JV to materialize post the commencement of operations at its Navi
Mumbai facility (most likely by Q2FY12).
Improved product mix led to 77bps expansion in EBITDA margins
Improvement in EBITDA margins by 77bps to 22% was led by better product mix such as
increased contribution from the domestic formulations and higher share of Nycomed JV.
Higher R&D expenses (5.7% of sales in Q3FY11 vis-à-vis 3.6% of sales in Q3FY10)
restricted further margin expansion.
Adjusted PAT at Rs1.6bn is up by 28%
APAT for the quarter grew by 28% YoY on account of a) robust operating performance, b)
lower depreciation cost (flat YoY), and c) higher other income (up 19.5% YoY). Higher tax
provisioning of 18% in Q3FY11 vs. 16% in Q3FY10 restricted further expansion in PAT. The
EPS for Q3FY11 and 9MFY11 stands at Rs7.9 and Rs24.2 respectively. We expect the
company to clock full year (FY11E) EPS of Rs31.3.
Supplies to Abbott, scaling up of JV’s provide long term visibility
Traction in export and domestic formulations, likely commencement of supplies to Abbott
and scaling up of operations at the Hospira and Nycomed JV ensures higher revenue
visibility. Supplies under Abbot deal for RoW market is likely to materialize into revenues in
FY12E. We believe these supplies would help Cadila manage its capacities optimally as
well as provide stable returns and profitability. Cadila’s JV with Hospira for oncology
injectibles products in US/EU is likely to scale-up in 2HFY12. We expect sales of Rs3.6bn
from this JV by FY13E. Under the Nycomed JV, supplies for the 14 APIs are likely to begin
from FY12 onwards. With this Cadila is poised to achieve earnings CAGR of 30% over
FY10-13E.
Introduce FY13 estimate and revise the target price to Rs847
We expect a robust performance in Cadila in FY12E and FY13E driven by a) US likely to
witness 8-10 new launches in FY12E and FY13E each, b) 14% revenue CAGR in the
domestic formulation business and c) 3 products being introduced in US and 6 in Europe
over the next 18 months which includes limited competition launch of Taxotere (Docetaxel,
US$1.5bn market). Clarity on niche product filings in the US generic market could provide a
positive upside and lead to expansion in valuation multiple. Additional positive catalysts
could emerge from monetization of the R&D pipeline.
With 30% earnings CAGR over FY10-13E (one of the best amongst comparable peers),
best in class return ratios (RoCE and RoE over 30%) and healthy balance sheet (Net D/E-
.5x), Cadila continues to remain our preferred bet in large cap space. We strongly believe
that Cadila should be a part of core holding in pharma portfolio from a long term
perspective. Cadila currently trades at 24.5x FY11E, 19.1x FY12E EPS and 14.8xFY13
EPS, which is at a discount to its peers. We believe such a discount should narrow down
given Cadila’s strong earnings trajectory, robust financials and upside triggers ahead. We
value Cadila at 16xFY13E earnings based on the above mentioned positives, to arrive at a
target price of Rs847. Our target multiple of 16x implies a PEG of 0.55x only. We continue
to maintain Accumulate rating on the stock.
Further milestone receipts from Abbott and higher than expected growth in domestic
formulations (estimated at 14%) may provide further upside to our estimates.
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