Cadila Healthcare (CDH IN, INR 721, upgrade to Buy)
Post our interaction with Mr. Pankaj Patel, CMD, Cadila Healthcare, we highlight our takeaways on business. We upgrade our earnings by 6-7% in FY13-14E led by upside from domestic business, lower-than-expected drop in profit in Hospira JV and margin expansion through cost optimization. Upgrade to ‘BUY’. FDA resolution in the near term will be a key positive, while drug policy implementation could be a negative.
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Domestic formulations back on track
Management is confident of outpacing industry growth in domestic market, ex-Biochem, by addressing therapy gap areas, excelling in sales force management and improving productivity. Revival in 2HFY12 (up 21% YoY) is indicative of higher growth momentum. Further, management is confident of deriving positive synergy by improving scale in recently acquired Biochem business.
USFDA resolution in sight
USFDA has concluded inspection at Cadila’s Moriya facility. While management awaits comments from FDA before giving conclusive stand on resolution, it is confident of the efforts to resolve the issue. Post resolution, there could be 6-8 approvals anticipated, which along with saving on legal and consulting fees, could yield higher margins.
Lower price erosion in Docetaxcel, a positive
Despite incremental competition in Docetaxel, the extent of price erosion is lower than our estimates. Management has indicated that it has not witnessed any slowdown in the JV’s revenue and profitability from Q4FY12 level. Though margins in Docetaxal may not remain at the current level in future, new product launches from JV in the US could partly compensate for profitability loss.
Outlook and valuations: Positives on horizon; Upgrade to ‘BUY’
We believe that growth concerns in the US and domestic market are behind. Moreover, the company’s focus on optimizing cost should expand margins by 150-200bps in next 2-3 years. We are confident on execution capability of management and vision to invest in higher growth areas. Upgrade to ‘BUY’ with TP of INR840 (18x FY14E).
Regards,
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