Cadila Healthcare Ltd.|Q2FY15 Result Update | Higher operating margin drives earnings for the quarter :: IndiaNivesh

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Better operating leverage led PAT to grow at higher rate than sales: Net sales and
adjusted PAT at Rs20.6bn and Rs2.8bn, grew by 20% y-y and 46% y-y, respectively,
for the quarter. The superior performance has been mainly due to pick up in domestic
formulation (DF) sales, increased US sales and reduced cost. EBIDTA margin improved
506bps y-y and 163bps q-q. This is mainly due to superior product mix and shutdown
of relatively higher cost Japan business. Downtrend in gross margin has taken a
pause and has showed improvement of 67bps sequentially. Lower rate of increase
in employee cost and other expense compared to sales growth has led to uptrend
in EBITDA to continue for this quarter as well. Tax rate for the quarter was lower at
16.6%, which further aided higher adjusted PAT growth. CDH had forex gain of
Rs12mn against forex loss of Rs125mn y-y on foreign currency borrowing.
US sales at Rs8bn grew by 70% y-y and 12% q-q: Strong y-y growth is mainly led by
new product launches. During the quarter, CDH launched four new products. The
new launches also included authorized generic for g-Niacin. CDH had only one ANDA
filing during the quarter, taking the cumulative filing to 250. At the end of 2Q FY15,
CDH had approval for 96 ANDAs and launched 68 in US market. CDH maintained its
guidance of filing 10-15 ANDAs in 2H FY15. With 144 ANDAs yet to be approved,
we expect CDH sales momentum in US market to continue if CDH receives approvals
at regular pace.
High base effect continue to impact overall DF sales growth for CDH: DF sales at
Rs6.8bn, grew by 8.7% y-y. The sales growth has been on the improving trend for
the past three quarters now. The sales growth remains adversely affected due to
high base on account of pricing cuts implemented on NLEM products and absence
of Boehringer Ingelheim products. However, adjusting for the same, the growth
rate is at 14% y-y, which is much better-than-industry average. During the quarter,
CDH launched 16 products, out of which 6 were new to market. We expect sales
momentum to continue for CDH on the back of new product launches and increased
traction in existing products.
Valuation: We increase our EPS estimate for FY15 and FY16 by 5.8% and 5.3% to
Rs53 and Rs68, respectively, to factor control on cost, partly led by shutdown of
Japan business, and increased operating leverage. Accordingly, we raise our price
target to Rs1,636 from Rs1,553, based on 24x FY16 earnings. We expect DF sales to
improve on the back of new product launches, increased traction in existing products
and reduction of base effect. With robust ANDA pipeline pending for approval, we
expect US sales growth to remain strong, subject to approvals from USFDA. Hence
we maintain BUY rating on the stock with implied upside of 16% from current levels

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