Upgrade Cadila to OUTPERFORM : Credit Suisse

● We upgrade Cadila to OUTPERFORM as risk-reward is in favour
now with concentration of profits in Joint Ventures reduced and
launch of Divalproex Sodium ER in the US could add 10% to FY15
EPS. Cadila has a strong ANDA pipeline and Divalproex should
bridge the gap before approval rate in the US pick up in FY15.
● Annual report shows JVs contribution to consol EBITDA reduced
to 24% in FY13 (FY12: 32%) and further to 18% in Jun-13 quarter.
This addresses our concern and reduces profit concentration.
● Cadila improved Biochem margins in FY13 (PBT margins up from
5% to 11% in FY13) but Nesher is still loss-making (Consent
Decree related charges). Nesher loss should reduce as
Oxycodone ramps-up and Nesher gets approval of third product.
● Cadila remained FCF negative in FY13 due to high capex
intensity. It should turn FCF positive in FY15 when US approvals
ramp-up and capex intensity reduces (manufacturing facility for
biosimilars and vaccines already completed in FY13). We cut
FY14E EPS by 10% (due to pricing policy impact and slower US
approvals) and TP by 5% to Rs760. Upgrade to OUTPERFORM

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High concentration in JVs declined now
Annual report disclosure shows that the contribution of JVs to
consolidated EBITDA decreased from 32% in FY12 to 24% and based
on Hospira disclosure, contribution of JVs further declined to 18% in
Jun-13 quarter due to the price erosion and market share loss in
Docetaxel. The disclosure further shows that ex-JV and ex-Wellness,
margins for Cadila have remained flattish over the past two years due
to no meaningful approval in the US.
Upgrade to OUTPERFORM; target price at Rs760
However, Cadila has approval of Divalproex Sodium ER and is
working on the launch of the product. Given reduced competition in
the product (Wockhardt’s market share decline) and price increase of
~4x, Divalproex should be a meaningful launch for Cadila. We assign
a 50% probability of Divalproex launch and it accounts for 10% of our
FY15E EPS. With 18% upside to our target price, we upgrade the
stock to OUTPERFORM from Neutral. Cadila has a strong ANDA
pipeline with 97 ANDAs pending with the US FDA and Divalproex
should bridge the gap before the approval rate in the US pick up.
Biochem margins improved but Nesher still loss-making
Cadila acquired both Biochem and Nesher in FY12. 2013 Annual
Report shows that PBT margins at Biochem improved from 5% in
FY12 to 11% in FY13 (in line with management’s guidance). Nesher
continues to be loss-making due to Consent Decree-related charges.
The loss should decline in FY14 as sales of Oxycodone ramp-up and
Nesher gets approval for its third product

Cadila infused Rs200 mn in Dialforhealth in 1Q14 (has pharmacy
stores across the country and is a 100% sub of Cadila). Cadila infused
capital due to accumulated losses of Rs94 mn as at 31 March 2013.
Other takeaways from Annual Report
● Cadila remained FCF negative in FY13 (negative FCF of Rs1.1
bn) due to high capex intensity. Cadila should turn FCF positive in
FY15 when US approvals ramp-up and capex intensity reduce.
Cadila completed manufacturing facility for monoclonal antibodies
(biosimilars) and vaccines in FY13.
● Cash tax rate for Cadila in FY13 was 34% whereas P&L tax rate
was 15% as it started paying 20% tax on Sikkim facility after tax on
partnership firms was imposed in the Mar-12 budget. Our target
price is adjusted for differential in cash tax rate and P&L tax rate.
● Cadila has a forex cover of US$121 mn outstanding (as at 31 Mar-
2013) where US$21 mn is a forward contract for receivables while
US$100 mn is a Range option contract on forecasted sales.
● Cadila pays commission to its Independent Directors in addition to
sitting fees (Cadila does not have ESOPs) and has proposed to
increase the maximum limit of commission to lower of 1% of profit
or Rs15 mn for each year for next five years.