Initiating Coverage
Cadila Healthcare Limited
May 26, 2011
ACCUMULATE
LOW RISK
PRICE Rs. 866
TARGET Rs. 960
Pharmaceuticals
– Bulk Drugs &
Formulations
STRENGTH: Focus on chronic therapies, Healthy Balance Sheet with best in class return
ratios, Low net gearing and consistent cash generation. WEAKNESS: De-growth in
Nycomed JV & subdued growth in Europe. OPPORTUNITIES: Foray into newer markets;
Commencement of Abbott & Bayer deals. THREAT: Exchange rate volatility, Price control
SHARE HOLDING (%)
Domestic business to post a double-digit growth led by new product launches,
focused approach on chronics & greater market penetration
Promoters
FII
74.8
5.5
FI / MF
13.3
Body Corporates
1.4
Public & Others
4.9
STOCK DATA
Reuters Code
Bloomberg Code
BSE Code
NSE Symbol
Market
Capitalization
International Business – Regulated markets of US & Japan to drive growth
whereas emerging markets will surge on robust sales in Brazil and Africa
532321
CADILAHC
Cadila's US business is expected to witness increased traction on the back of new product
launches (65 ANDA approvals) & with the commencement of filling of potential lowcompetition products (transdermal patches and respiratory products) whereas its presence
in Japan, though not very significant now, holds immense revenue potential. With the strong
growth prospects in the Brazilian market and plans to launch 8-10 products annually, we
expect Cadila’s international revenues to grow at a CAGR of 23.3% over FY11-13E.
204.7 mn
52 Weeks (H/L)
Rs. 941/582
Avg. Daily
Volume (6m)
15,538 Shares
Price Performance (%)
1M
3M
6M
2
13
15
200 Days EMA: Rs.749
Part of
Cadila in recent years has strengthened its position in the chronic segment ( 57% of
Domestic formulations) through the creation of the specialty divisions and steady ramp up in
the field force (~4500). With an increasing focus on expanding its penetration in semi urban
& rural areas and increasing its doctor coverage backed by its continous thrust on
introducing new products (Launched 60 new products in FY11) coupled with the
commencement of its JV with Bayer in Q4FY11, we expect Cadila’s domestic formulations to
grow at 14.7% CAGR over the period of FY11-13E.
CADI.BO
CDH IN
Rs. 177,305 mn
US$ 3940 mn
Shares
Outstanding
for the products covered under DPCO and Delay in regulatory approvals.
Classic
Consumer Business – Sustained growth
Cadila’s Consumer business has been growing rapidly (FY07-11 – CAGR of 28.8%) due to a
strong growth in their respective product categories and dominant market share in the
segments. Owing to its flagship brands’ leadership position namely, Sugar Free, EverYuth
and Nutralite; we expect Cadila’s consumer business to continue to grow at a CAGR of 22.5%
over FY11-13E.
Hospira JV to off take loss of business from Nycomed JV
Q4FY11 marked Hospira JV’s entry into the US market with the launch of generic Taxotere.
The JV is currently selling three products in the EU and one product in the US. While we
believe, the Nycomed JV will be under strain, both in terms of volume and value owing to
generic competition for Pantoprazole, the Hospira JV will drive growth as the six‐product
supply arrangement (for US and EU) is likely to unfold over FY11-13E.
OUTLOOK & VALUATION
ANALYST
Suneel Rao | +91 22 4093 5068
suneel.rao@sushilfinance.com
SALES:
Devang Shah | +91 22 4093 6060/62
devang.shah@sushilfinance.com
Nishit Shah | +91 22 4093 5074
nishit.shah@sushilfinance.com
Cadila achieved the $1bn milestone in revenue during FY11, a 24.6% CAGR growth during
FY07-11. With a vision of the management of tripling its business in four years, we believe
Cadila's future growth will be led by increased traction in its international businesses, a
ramp-up in supplies to Hospira and sustained double-digit growth in the domestic
formulations and consumer businesses. In view of strong revenue visibility in business
coupled with a healthy balance sheet and best in class return ratios, we recommend an
“ACCUMULATE” with a target price of Rs. 960 (20x FY13E EPS). It is currently trading at a P/E
of 18.1x its FY13E EPS of Rs. 47.9.
KEY FINANCIALS
Y/E
Mar.
FY10
FY11
FY12E
FY13E
Please refer to important disclosures at the end of the report
Sushil Financial Services Private Limited
Office : 12, Homji Street, Fort, Mumbai 400 001.
Revenue
(Rs mn)
36868.0
46301.8
55068.8
65335.1
RPAT
(Rs mn)
5051.0
7109.9
7968.6
9797.1
AEPS
(Rs)
37.0
34.7*
38.9
47.9
AEPS
(% Ch.)
66.6
-6.2
12.1
22.9
*1:2 bonus issue in FY11
P/E
(x)
23.4
24.9
22.3
18.1
ROCE
(%)
21.5
29.1
27.8
27.8
ROE
(%)
37.0
38.7
33.3
31.6
P/BV
(x)
7.3
8.2
6.3
4.9
For private Circulation Only.
Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435.
Phone: +91 22 40936000 Fax: +91 22 22665758 Email : info@sushilfinance.com
Cadila Healthcare Ltd.
COMPANY OVERVIEW
Zydus Cadila is a global healthcare provider founded by Late Mr. Ramanbhai B. Patel in
1952. After the split in 1995, the group restructured its operations and now it operates as
Cadila Healthcare Ltd (Cadila). Cadila manufactures and markets a wide range of products,
including formulations, active pharmaceutical ingredients (API), intermediates, biologicals,
animal healthcare products and consumer wellness products (Zydus Wellness). It has a
strong presence in the cardiovascular, gastrointestinal, women’s healthcare segments,
respiratory, pain management, CNS, anti-infectives, oncology, neurosciences, dermatology
and nephrology segments with field force of 4,500 reaching out to super specialists,
specialists, surgeons, physicians, and the rural markets.
On the international front, Cadila operates in both the developed markets of the US, EU
and Japan as well as the emerging markets (EMs) of Latin America, Asia-Pacific, Africa and
the Middle East. It is one among the very few companies to have presence in the top three
markets – US, Japan and Europe. It also has presence in high growth emerging markets.
Cadila believes in quality and hence gives more thrust on R&D for its future expansion
hence invests close to 5-6% of revenues annually in R&D.
Cadila has entered into long-term strategic alliances with global players like Hospira,
Nycomed, Abbott Laboratories and Bayer. While it struck JVs with Nycomed (1998) and
Hospira (2009), recently it entered into an agreement with Abbott to out-license 24
branded generics to market in 15 key emerging markets from FY12 onwards.
Cadila caters to consumer market also via its listed subsidiary - Zydus Wellness, in which it
holds 72% share. Zydus wellness is the market leader in the segments present which was
possible only due to its niche segment approach.
Cadila’s revenue profile can be divided into two broad segments:
 Domestic Operations (comprising of branded and generic pharmaceutical
formulations, API’s, Consumer Wellness business & Animal Healthcare business)
 International Operations (comprising sales outside of India of branded and
unbranded generic pharmaceutical formulations, API’s & JVs with other Pharma
companies),
Cadila Healthcare Ltd (FY11)
Domestic (49.4%)
India
Formulations
(37.9%)
API's
(0.8%)
Zydus
Wellness
(7.4%)
Export (50.6%)
Animal
Healthcar
e (3.3%)
Bayer JV
(0%)
Formulations
(37.7%)
Formulation Joint
Ventures (4.8%)
API's
(8.1%)
- USA (21.4%)
- Branded
Generics
- Europe
(6.1%)
- Generics
Generics
- Brazil (5.0%)
Hospira JV
(4.8%)
Abbott
JV (0%)
BSV
Pharma
JV (0%)
Nycomed
JV (1.2%)
- Japan (0.9%)
- Emerging
Markets
(4.4%)
May 26, 2011
2
Cadila Healthcare Ltd.
While previously the India formulations accounted for the largest component of the
revenue pie, it has, with time, reduced, and since FY09, the revenue from international
operations has taken on greater prominence.
Domestic Business
India Formulations: Cadila operates both in branded generics as well as generics
generics segment in the domestic market although major portion of revenues comes from
branded generics portfolio i.e. 94% of domestic formulations revenues. The Company has
expanded its portfolio by entering newer therapeutic areas organically or through
acquisitions, aggressively launching new products with the first mover advantage in
several products, gradually shifting its focus from acute segments to fast growing and
sustainable chronic segments (57% of its FY10 domestic revenues) and enhancing market
penetration through field force expansion.
Cadila has retained its leadership position in cardiovascular, gastro intestinal, women’s
healthcare and respiratory segments in the covered market. It is the fifth largest player in
the Indian formulation market with ~3.7% market share, according to IMS ORG. As on
FY11, 16 of its brands featured in the top 300 pharmaceutical brands in India. It has a
strong field force of 4,500 people spread across 11 therapeutic focused divisions and
doctor coverage of 125,000. A detailed breakup of the company’s domestic revenue is
depicted in the chart below:
Domestic Formulations Revenue Breakup
100%
% of Domestic Formulations
90%
14
0
2
4
7
14
10
2
3
3
7
10
2
3
3
7
11
11
11
3
2
4
6
10
11
11
11
11
40%
10
10
11
11
30%
17
16
16
16
80%
70%
60%
50%
Others
Dermatology
Diagnostics
Neutraceuticals
Neurologicals
Biologicals
Pain Management
Anti Infectives
20%
10%
Female Healthcare
21
21
21
21
Respiratory
GI
0%
FY07
FY08
FY09
FY10
CVS
Rs. in Mn
Domestic Business - Historical Play
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
CAGR
(07-11)
of
13.4%
CAGR
(07-11)
of
28.8%
CAGR
(07-11)
of
31.3%
CAGR
(07-11)
of 3.9%
CAGR
(07-11)
of
(1.8%)
Branded
Formulations
Consumer &
Others
Animal
Healthcare &
Others
Generic
Formulations
API's
FY08
FY09
FY10
FY07
FY11
Source: Company
May 26, 2011
3
Cadila Healthcare Ltd.
The domestic business currently constitutes around 49% of FY11 gross sales with branded
& generic formulations contributing 78% to its domestic business.
Zydus Wellness: Cadila also has a consumer healthcare and wellness business under a
separate listed company - Zydus Wellness in which it holds 72.5% stake. Established in
1994, Zydus Wellness Ltd (ZWL) manufactures, sells and markets consumer products in
India. Its products include table margarine and spreads, cosmeceuticals and sweet meat.
ZWL’s brands include Nutralite, which is table margarine; Sugar Free, which is a low calorie
sweetener and EverYuth, which includes skincare products. Nutralite is a table margarine
which has less cholesterol and does not contain hydrogenated fats. Under sugar free
alternatives and substitutes it offers Sugar Free Gold, Sugar Free Natura, Sugar Free D'Lite
ready to drink and powder drink names.
Animal Healthcare: Cadila is also present in the animal health market in India through
its 100% subsidiary Zydus Animal Health Ltd., (ZAHL), offering several products meant for
the livestock and poultry segments. We expect this segment to post a 14.5% CAGR over
the next two years and report Rs. 1930 mn revenues in FY13E.
International Business
Cadila operates in both the developed markets of the US, EU and Japan as well as the
emerging markets (EMs) of Latin America, Asia-Pacific, Africa and the Middle East. The
company’s foray into the international markets has primarily been through the inorganic
route providing it access to brands and distribution channels. Of the territories that the
company caters to, the US territory is the most productive from a top line perspective,
followed by Europe and then Brazil.
A detailed geographical breakup of the company’s export business is given below:
Export Formulations Breakup
100%
24%
80%
60%
0%
5%
34%
15%
1%
19%
18%
2%
17%
25%
22%
38%
40%
41%
FY07
FY08
FY09
12%
2%
14%
12%
2%
13%
21%
16%
51%
57%
FY10
FY11
40%
20%
0%
US
Europe
Brazil
Japan
Emerging Markets
Source: Company
May 26, 2011
4
Cadila Healthcare Ltd.
12000
International Revenue Breakup
10000
Rs. in Mn
8000
6000
4000
2000
0
FY07
US
Emerging Markets
FY08
Europe
Hospira JV
FY09
Brazil
Nycomed JV
FY10
FY11
Japan
API's
Source: Company
Joint Ventures (JV’s)
Cadila has adopted a unique model to grow its business. It has formed JV’s with strategic
partners to have long term relationship which helped the company in having higher
revenue visibility and to gain from the experience of its partners. Till now it has formed
three such JV’s in the formulations space and one JV in the API space.
API JV with Nycomed: Cadila formed a JV with Swiss Pharma major, Nycomed in 1999 to
manufacture active ingredients for API Pantoprazole, which is an antiulcerants sold under
the brand name Protonix by Pfizer. Its revenue contributions, however, have fallen in
Q4FY11 as the Pantoprazole drug lost its patent in Feb 2011 in the US. With the scope of
the JV expanded to supply intermediates for 14 additional APIs (including Pantoprazole)
for both generic and patented drugs and eventual shifting of its entire API production to
India, we expect the sales to pick up slowly.
Formulation JV’s:
 Hospira JV: The JV mainly focuses on Injectibles and for that it has set up a
manufacturing facility in SEZ Ahmedabad. FY10 was the first year of commercial
operations for the JV with three products for European region. With supply of generic
Taxotere formulation from India JV plant in Q4FY11, the Zydus-Hospira JV has
reported 156% sales growth in FY11. Out of the six products that the JV plans to
supply to US and Europe, the JV has already begun supply of 3 products to Hospira to
be marketed in the EU and 1 product to be marketed in the US. The management has
indicated plans to launch the remaining products in FY12E.
 Abbott JV: Cadila entered into a strategic alliance with Abbott Laboratories to license
24 branded generics in 15 key emerging markets in Q1FY11. Abbott has the option to
increase the scope of the agreement to 40 drugs. As part of the agreement, Cadila has
already received a licensing fee of Rs. 470 mn from Abbott.
 Bayer JV: Cadila and Germany’s Bayer Healthcare have signed an agreement to set up
a 50:50 joint venture (JV) company Bayer Zydus Pharma to market pharmaceutical
products in India with focus in areas such as women’s healthcare, metabolic disorders,
diagnostic imaging, cardiovascular disease, anti-diabetic treatments and oncology.
May 26, 2011
5
Cadila Healthcare Ltd.
INVESTMENT ARGUMENTS
Domestic business to post a double-digit growth led by new product
launches, focused approach on chronics & greater market penetration
Cadila is one of the oldest players in the Indian formulations market for several years. With
a continuous thrust on improving market presence and market share, it has
 expanded its portfolio by entering newer therapeutic areas organically or through
acquisitions,
 aggressively launching new products with the first mover advantage in several
products,
 gradually shifting its focus from acute segments to chronic segments and
 enhanced market penetration through field force expansion.
These strategic initiatives have helped the Company become one of the dominant players
in the Indian formulations market with theleadership position in several therapeutic
categories.
Increased focus on Chronic segments…..
In recent years, Cadila has strengthened its position in this segment through the creation
of the specialty divisions and ramp up in the field force. Cadila derives 57% of its domestic
formulations segment from lifestyle related therapy segments (Chronic) with leadership
position in cardiovascular, gastro intestinal, women’s healthcare and respiratory segments
in the covered market. With a growing shift towards the chronic segment, we believe
Cadila will continue to benefit from the growth opportunity in the domestic chronic
therapy segments given its established player status and relevant portfolio of products.
Ramp up in field force for greater penetration…..
With an incresing focus on chronic segments, Cadila is also focusing on expanding its
penetration, especially in semi-urban and rural areas and increasing its doctor coverage to
2,00,000 doctors from the current coverage of 1,25,000. In FY11 It expanded its field force
in the cardiology by 300 and respiratory by 100 agents, while in FY10, it had formed Zydus
Cardiva, with a specific focus on urban markets with a range of anti-hypertensive and
aspirin combinations. With a physician focus, these initiatives are expected to start
yielding desired results from next year.
No. of Products
Increase in new product introductions…..
Cadila continued its thrust on
Domestic new product launches
70
new product introductions to
60
drive growth and launched
60 new products (including
50
line extensions) in the
40
domestic market in FY11. Out
30
60*
of this, 24 products were
20
35
30 30
launched for the first time in
25
25 30
10
NA
India, the prominent launch
0
being that of indigenously
FY08
FY09
FY10
FY11
developed H1N1 vaccine
VaxilFlu-S. Going ahead,
New product Launches
Line Extensions
Cadila plans to launch 35-40
Source: Company, Sushil Finance, 60* includes line
new products (excluding line
extensions
extensions) every year. Also
only 12% of domestic revenues come from products under Drug Price Control Order
(DPCO) that is one of the lowest in the pharmaceutical industry.
May 26, 2011
6
Cadila Healthcare Ltd.
Introduction of Zydus-Bayer JV in Q4FY11…..
Q4FY11 domestic sales witnessed introduction of proceeds from the Zydus-Bayer JV for
the domestic markets. As per the terms of the JV, Bayer will supply products and Cadila is
expected to use its marketing network to sell the products in the local markets. However,
we have not factored in any numbers from the JV in our projections due to inadequate
information on the same. Any positive development on the same will act as an upside risk.
Domestic Formulations gaining traction
25000
1124
1041
20000
Rs. In Mn
946
15000
833
10000
16200
13625
18792
21423
5000
0
FY10
FY11
Branded Formulations
FY12E
FY13E
Generic Formulations
Source: Company, Sushil Finance
Domestic formulations gaining traction…..
During FY07-10, the company’s domestic formulations revenue reported a CAGR of 10.9%,
however, in FY11 it witnessed a growth of 19% which we believe is on the back of various
initiatives taken by the company. We expect Cadila’s domestic growth rate to continue to
pick up from lower growth rates in FY07-10 as a result of product launches, in-licensing
arrangements, and a special focus on rural markets. We thus expect Cadila’s domestic
formulations to grow at 14.7% CAGR over the period of FY11-13E.
Zydus Wellness – Sustained growth across products
Rs. in Mn
Zydus Wellness, a 72.5% subsidiary of Cadila, operates in niche health and skincare
segments.
Among
Consumer Business - Sustained growth across products
other products, its
6000
portfolio includes low
5000
calorie sugar and low
cholesterol alternative
4000
for butter. All these
categories are growing
3000
5035
at a CAGR of ~29% for
4127
2000
the period FY07-11.
3355
2675
The strong growth can
1000
1947
1539
be attributed to the
0
sustained robust sales
FY08
FY09
FY10
FY11
FY12E
FY13E
volume growth in its
pillar brands: Sugar
Source: Company, Sushil Finance
Free, EverYuth and
Nutralite. The business has been growing rapidly due to a strong growth in their respective
product categories and dominant market share in the segments.
May 26, 2011
7
Cadila Healthcare Ltd.
To cater to the growing demand of Sugar Free and EverYuth, which are outsourced at
present, the Company is setting up a manufacturing facility in Sikkim, which is expected to
be commissioned in Q1FY12E. This state-of the- art facility will be sufficient to meet the
supply requirements for the next five to seven years.
Zydus Wellness has launched various products during the year namely:
 ActivLife (a nutritional supplement).
 Supplements under the “Sugar free” umbrella
 Sugar Free tea-lite,
 Flavoured sachets of sugar free,
 sugar free mint and
 Sugar Free Natura Sweet Drops.
In the future we expect the business to post robust growth of 22.5% CAGR over FY11FY13E.
International markets – US gaining traction and Europe expected to be
subdued
Cadila has spread its presence in US, Europe, Japan, Latin America, Asia Pacific, Africa and
Middle East during the last couple of years by launching products in the therapeutic areas
like CVS, GI, pain management, etc. The company’s foray into the international markets
has primarily been through the inorganic route providing it access to brands and
distribution channels. It also has in-licensing arrangements with international players like
Bayer, Nycomed, Hospira etc. On the back of robust performance in international markets
mainly US (CAGR 07-11: 61%) and Brazil (CAGR 07-11: 89%), the share of international
formulations in the company’s total revenues has increased to 50.6% in FY11 from 32.3%
in FY07. Cadila’s international revenues have grown at a CAGR of 46% over the period of
FY07-11.
US to continue to remain key international market for Cadila…..
Accounting for nearly 42% (FY11) of its international revenues, US remains a key
international market for Cadila. With a portfolio of 41 products focused, Cadila’s sales have
grown at a CAGR of 61.3% in FY07-11 period. Currently, it is among the top 20 generic
companies in the US.
Strong Pipeline of products
250
41
200
29
150
25
16
100
50
39
65
54
42
130
78
92
106
FY08
FY09
FY10
0
ANDA's Filed
ANDA's Approved
FY11
Products Launched
Source: Company, Sushil Finance
Cadila has filed 130 cumulative ANDAs till date and out of that received 65 approvals. It
launched 12 new products including four Day-1 in US in FY11. It has filed total 24 ANDAs
May 26, 2011
8
Cadila Healthcare Ltd.
and seven DMFs during FY11. In Q4FY11, the company saw some new order flows on the
back of supply issues for other generic players.
To further strengthen its position in the most competitive market, Cadila has initiated the
process of launching products in other dosage forms like pulmonary, nasal and Injectibles.
It has already filed 7 ANDAs for Nasal and 14 for Parenterals. These products are “difficult
to make” ensuring higher growth and better margins.
Going forward, the company’s target will be 12-15 ANDA filings and 7 to 8 product
launches every year in the US. On the belief that it would be difficult for the company to
maintain its historical yearly growth rate on a high base, we expect the growth rate to
taper and factor in a 27.5% CAGR over FY11-13E.
Japan – though not very significant now, holds immense revenue potential……
Cadila entered the Japanese market through the inorganic route with the acquisition of
Nippon Universal Pharma Ltd in FY07. It also has a manufacturing facility approved by the
Japanese regulatory authority.
With a size of nearly US$80bn, Japan is the second-largest Pharma market globally.
However with the generic penetration still low it is the most difficult market to make
inroads.
Cadila is following a strategy of in-licensing of products and acquisition of brands for better
understanding of the market. It launched generic Amlodipine in Japan in FY11, a first for
the company as the product was developed and manufactured in India. With 27 inlicensed products and 2 in-house products already launched in Japan and initiation of the
process of filling from India, we believe Cadila has created a strong base in Japan.
We project sales in the Japanese market to grow at a CAGR of 30% over FY11-13E on a
small base.
Europe market – subdued growth going forward…..
Cadila has a presence in Europe through the inorganic route that it took to enter France
(Alpharma SAS, 2003) and Spain (Laboratorios Combix, 2008). Cadila’s European
operations have grown at a CAGR of 21.4% between FY07-11. However, it posted flat
revenues in FY11 on the back of price cuts that the government takes every two years in
France and a challenging Spain market which the company entered in 2009.
US & Europe expected to grow at a CAGR of 27.5% &
4.0% over FY11-13E
18000
16000
14000
713
2980
549
2865
12552
2755
422
2000
316
4000
6715
6000
9655
8000
15689
10000
2740
Rs. in Mn
12000
0
FY10
FY11
US
FY12E
Europe
FY13E
Japan
Source: Company, Sushil Finance
May 26, 2011
9
Cadila Healthcare Ltd.
Till date in Europe, Cadila has filed 116 new product dossiers and received approval for 67
products.
In France, 20 products were launched in FY11, including 4 day‐1 launches. Growth in the
market is likely to be a challenge, given the price cuts the country has introduced. Spain,
on the other hand, is likely to grow in FY12E. Going forward, the company’s growth in
Europe would be driven by new product launches and an improvement in margins by
product transfer to Indian facilities. The company has site transferred 46 products for the
French market whereas 3 site transfers were done for Spain to protect profitability.
However, we expect the Europe market to remain subdued and grow at a CAGR of 4% over
FY11-13E.
Emerging markets – Brazil to remain the mainstay with focus on increasing its
presence elsewhere
Cadila, as part of its international strategy, has made significant investments to establish
presence in the emerging markets and should benefit as operations in these markets scale
up.
Brazil market – Garnered significant strength…..
In Brazil, Cadila operates in both branded (through the acquisition of Nikkho in FY08) and
generic segments (through its subsidiary Zydus Healthcare Brasil Ltda). Cadila’s branded
business grew by 15% in FY11 whereas the generic business reported a 25% growth. The
launches of four new products have achieved healthy growth in branded generics and pure
generic business in Brazil. Cadila has 64 cumulative filings in place; 23 products have been
approved, of which 16 products have been launched. Cadila’s sales from this market have
grown at a CAGR of 22.3% in FY08-11 period on the back of a strong product portfolio of
25 branded and 16 generics products.
Brazilian Business Performance
4000
3500
Rs. In Mn
3000
2500
2000
3459
1500
2813
1000
500
1230
1629
1818
FY09
FY10
2250
0
FY08
FY11
FY12E
FY13E
Source: Company, Sushil Finance
With the strong growth prospects in the Brazilian market and plans to launch 8-10
products annually we believe the company is set for strong growth. We expect the
company to register a CAGR of 24.0% over FY11-13E.
Emerging markets – Growth momentum to gather pace…..
Cadila has presence in more than 20 smaller emerging Pharma markets such as Sri Lanka,
Myanmar, Uganda, Taiwan, Philippines and South Africa. As a leading player in some of
these markets, Cadila has grown at a CAGR of 22% over FY07-11 with revenues accounting
for 4.4% of the total sales (FY11). Cadila made Simayla Pharmaceuticals a wholly-owned
subsidiary in FY10 with a view to increase its presence in the SA market. Cadila is
May 26, 2011
10
Cadila Healthcare Ltd.
developing a strong product pipeline from India to capture the demand for generic drugs
in South Africa.
Emerging Markets
3000
2500
Rs. In Mn
2000
1500
2780
2376
1000
500
1980
1750
1590
FY09
FY10
971
0
FY08
FY11
FY12E
FY13E
Source: Company, Sushil Finance
Cadila also plans to foray into newer markets and has identified Thailand with market size
of $2 bn. It is the second largest pharmaceutical market in South East Asia, growing at 16%
CAGR. We thereby expect sales from emerging markets to grow at a CAGR of 18.5% in
FY11-13E.
Hospira JV to offset for loss of business from Nycomed JV with ramp up in
Abbott to start from FY13E.
Hospira JV flourishing on the back of Taxotere supply…..
Hospira received a USFDA approval for generic Docetaxel (Taxotere) to be sold in the
regulated markets. The medication is a generic version of Sanofi-Aventis's Taxotere.
Hospira with its JV with Cadila introduced the drug in 4QFY11 resulting in a spurt in sales
during Q4FY11. The JV is also sole supplier of Gemcitabine to Hospira which is expected to
be launched post Teva’s 180 days exclusivity in July 2011. With this Cadila is supplying 3
products to EU and 1 product to US out of the contract signed for supplying six products in
each market.
Going forward, we expect sales for the Hospira JV to be maintained at such elevated levels
as more products await approvals and the contribution to the Zydus-Hospira JV is expected
to rise significantly. We expect the ramp up in this business to happen in FY12E through
timely launch of key products. We thereby expect it to register a CAGR of 37.5% over FY1113E.
Nycomed JV witnessing de-growth on the back of erosion in the revenues from the
generic Pantoprazole…..
After the patent expiry of Pantoprazole, the scope of the JV has been expanded to supply
intermediates for 14 additional APIs for both patented and generic products. Cadila
Nycomed venture has commissioned the newly expanded API manufacturing facility at
Navi Mumbai, marking transition of JV from an intermediate manufacturer to a full-fledged
API manufacturer. We expect Nycomed JV sales to de-grow at a CAGR of ~13% over FY1113E.
Abbott Deal to ramp up from FY13E…..
Cadila has entered into a 24 product agreement with Abbott for 15 emerging markets,
expandable up to 40 products. The company has already started dossier registrations for
the products. Though the product launches would start from FY2012, we believe the ramp
May 26, 2011
11
Cadila Healthcare Ltd.
up in the revenues will start from FY13E and we have factored in Rs. 500 mn from the
same in FY13E.
Mixed growth in JV's
FY13E
423
FY12E
445
4067
3013
556
FY11
2152
758
839
FY10
0
1000
2000
3000
4000
5000
Rs. in Mn
Nycomed JV
Hospira JV
Source: Company, Sushil Finance
Consistent past performance and improving margins
Cadila, backed by its steady growth in the domestic market, consistent play in its consumer
business and exponential growth in its international business, has delivered excellent
numbers in the past. The company’s revenue has grown at a CAGR of 25.7% from FY07-11,
while the EBITDA and PAT have grown at a CAGR of 28.6% and 32.1% respectively. This is
on the back of the company’s improving margins over the years.
70000
65335
Net Sales (Rs. In Mn)
60000
55069
46302
50000
36868
40000
29275
30000
23229
18547
20000
10000
0
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
Source: Annual Report, Sushil Finance
EBIDTA (Rs. In Mn)
0
FY07
FY08
FY09
FY10
EBIDTA (Rs. In Mn)
FY11
FY12E
13.7%
12.6%
11.1%
8000
14.5%
FY07
FY08
FY09
7969
9797
10%
8%
6%
4%
2%
0
EBIDTA Margin
16%
12%
4000
FY13E
18%
14%
6000
2000
15.0%
10.4%
7110
6058
2000
3780
4000
8086
6000
14537
19.7%
12005
8000
10343
20.4%
4582
Rs. in Mn
10000
20.7%
10000
5051
12000
15.4%
3031
22.3%
21.8%
21.9%
RPAT (Rs. In Mn)
12000
2576
14000
23%
23%
22%
22%
21%
21%
20%
20%
19%
19%
18%
2338
22.3%
Rs. in Mn
16000
0%
FY10
RPAT (Rs. In Mn)
FY11
FY12E
FY13E
RPAT Margin
Source: Annual Report, Sushil Finance
May 26, 2011
12
Cadila Healthcare Ltd.
Cadila’s EBIDTA margins saw a marginal increase in FY11 on the back of increased
contribution from the Hospira JV (Docetaxel sales in Q4FY11). With the contribution from
Docetaxel to decline as competitors enter in the market and increased spend by the
company on marketing on account of deeper penetration in domestic market and
venturing into newer emerging markets; we believe the EBIDTA margins will decline in
FY12E thereby factoring in EBIDTA margin of 21.8% for FY12E. With expanding reach in the
domestic business, strong traction from exports triggered by a growing presence in
developed and emerging markets coupled with new product launched from the Hospira
JV, we expect revenues to grow at a CAGR of 19.5% for FY11-FY13E. Its EBITDA is likely to
grow at CAGR of 18.6% and PAT to grow at a CAGR of 17.4% in the same period.
Strong balance sheet and Healthy return ratios
Debt to Equity
14000
1.2
12000
1.0
1.0
10000
0.8
8000
0.8
4000
0.6
0.7
6000
0.5
0.4
0.5
0.4
0.3
2000
0
0.2
0.0
FY07
FY08
FY09
Debt
FY10
FY11E
FY12E
FY13E
D:E Ratio
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Healthy ROE & ROCE
38.7
33.3
37.0
27.2
26.4
18.2
18.5
FY08
FY09
31.7
29.1
27.8
27.8
FY11E
FY12E
FY13E
21.5
FY10
ROCE (%)
ROE (%)
Source: Annual Report, Sushil Finance
Cadila did a capex of Rs. 4.6 bn in FY11 and has plans for Rs. 5 bn for FY12 and FY13. The
planned expenditure is aimed at developing larger infrastructure and expanding network
in vaccine, and domestic formulation business. However, the D: E ratio of the company has
decreased from 1.0x in FY09 to 0.5x in FY11. With the company generating sufficient cash
flows to fund its future capex requirement, we believe the company’s D:E ratio is likely to
decline to 0.3x by FY13E, thus strengthening the balance sheet further. Cadila has healthy
return ratios with ROE & ROCE pegged at 33.3% and 27.8% respectively for FY12E.
May 26, 2011
13
Cadila Healthcare Ltd.
RISK & CONCERNS
Price control for the products covered under DPCO
While the domestic formulations business enjoys high margins, the industry however
remains vulnerable to changes in Government policies related to price control.
Approximately 12% of the company's domestic revenues were subject to price control
under the DPCO. In the event of expansion of list under price control, the company's
revenues and margins might get impacted.
Unfavourable currency movements:
Cadila derives around 51% of its revenues from its export business to countries like US,
Europe, Brazil, and emerging markets etc. Thus any appreciation in the INR against
respective currencies will result in the erosion of margins. However, as a conscious effort
to mitigate this risk partly, Cadila has taken forward cover to the extent of $93mn for
FY12E export revenues.
Delay in Regulatory Approvals:
A significant portion of Cadila’s topline is expected to be driven by new product launches
in the domestic as well international markets. Any unanticipated delays in receiving
necessary approvals from the local authorities could hamper our future revenue
estimates. Also any negative news flow on the regulatory front in any of the markets
that’s the company caters to could impact our earnings estimates.
OUTLOOK & VALUATION
Cadila with a focused approach towards its domestic business is now looking to improve
its presence in the under-penetrated semi-urban and rural areas. We believe new
product introductions & increased geographical exposure through field force expansion
will help the domestic segment to register a CAGR of 14.7% over FY11-13E. On the export
front, Cadila’s strong product pipeline in the US market coupled with the commencement
of filling of potential low-competition products (transdermal patches and respiratory
products) envisages huge opportunities in the US market. In emerging markets, Cadila is
aggressively targeting Brazil and the CIS region. We expect Cadila’s export business to
grow at a CAGR of 23.3% over FY11-13E.
Cadila achieved the $1bn milestone in revenue during FY11, a 24.6% CAGR growth during
FY07-11. With a vision of the management of tripling its business in four years, we believe
Cadila's future growth will be led by increased traction in its international businesses, a
ramp-up in supplies to Hospira and sustained double-digit growth in the domestic
formulations and consumer businesses. In view of strong revenue visibility in business
coupled with a healthy balance sheet and best in class return ratios, we recommend an
“ACCUMULATE” with a target price of Rs. 960 (20x FY13E EPS). It is currently trading at a
P/E of 18.1x its FY13E EPS of Rs. 47.9.
May 26, 2011
14
Cadila Healthcare Ltd.
PROFIT & LOSS STATEMENT
Y/E March
Net Sales
Raw material
(Rs.mn)
FY10
FY11
FY12E
FY13E
36868.0
46301.8
55068.8
65335.1
BALANCE SHEET STATEMENT
As on 31st March
Share Capital
FY10
(Rs.mn)
FY11
FY12E
FY13E
682.0
1023.7
1023.7
1023.7
Reserves & Surplus
15603.0
20691.1
27072.4
35272.7
Net Worth
16285.0
21714.8
28096.1
36296.4
11784.0
14753.8
17622.0
20907.2
Manufacturing
1660.0
2502.0
3028.8
3560.8
Secured Loans
9782.0
9850.4
10235.9
10401.5
Staff Cost
3930.0
6089.2
6332.9
7186.9
Unsecured Loans
1123.0
1123.0
1123.0
1123.0
28478.0
36040.0
43063.8
50798.1
Total Loan funds
Total Expenditure
PBIDT
Interest
Depreciation
Other Income
PBT incl OI
Tax
11358.9
11524.5
1126.6
1126.6
1126.6
Capital Employed
28723
34484
41624
50450
10343.0
12005.0
14537.1
821.0
780.4
795.1
806.7
Net Block
16844.0
20154.4
23572.3
26684.9
1339.0
1269.2
1582.1
1887.4
Cap. WIP
2111.0
2111.0
2111.0
2111.0
207.0
206.9
206.9
206.9
Sundry Debtors
4668.0
7652.4
7694.5
9129.0
Cash & Bank Bal
2507.0
2952.0
4746.8
8360.0
Loans & Advances
3070.0
4106.3
4224.5
5012.0
Inventory
7504.0
8118.5
10138.7
12143.4
Curr Liab & Prov
8661.0
11188.5
11441.3
13568.7
Net Current Assets
9088.0
11640.7
15363.2
21075.7
Total Assets
28723
34484
41624
50450
159.0
131.1
137.7
163.3
6039.0
8424.5
9765.5
12006.3
741.0
1063.6
1464.8
1800.9
5298.0
7360.9
8300.6
10205.3
Extraordinary Exp./
(Income)
-247.0
-251.0
-332.0
-408.2
RPAT after MI
5051.0
7109.9
7968.6
9797.1
FINANCIAL RATIO STATEMENT
Growth (%)
Net Sales
EBITDA
Adjusted Net Profit
Profitability (%)
EBIDTA Margin (%)
Net Profit Margin (%)
ROCE (%)
ROE (%)
Per Share Data (Rs.)
EPS (Rs.)
CEPS (Rs.)
BVPS (Rs)
Valuation
PER (x)
PEG (x)
P/BV (x)
EV/EBITDA (x)
EV/Net Sales (x)
Turnover
Debtor Days
Creditor Days
Gearing Ratio
D/E
10973.4
1141.0
8086.0
RPAT
Y/E March
10905.0
Deferred Tax
Investments
CASH FLOW STATEMENT
FY10
FY11
FY12E
FY13E
25.9
33.5
74.7
25.6
27.9
38.9
18.9
16.1
12.8
18.6
21.1
22.9
21.9
13.7
21.5
37.0
22.3
15.4
29.1
38.7
21.8
14.5
27.8
33.3
22.3
15.0
27.8
31.6
37.0
45.5
119.4
34.7
40.9
106.1
38.9
46.6
137.4
47.9
57.1
177.7
23.4
0.4
7.3
15.6
3.4
24.9
8.2
17.9
4.0
22.3
1.8
6.3
15.3
3.3
18.1
0.8
4.9
12.4
2.8
46
177
48.6
186.8
51.0
173.0
51.0
173.0
0.7
0.5
0.4
0.3
(Rs.mn)
FY10
FY11
FY12E
FY13E
6039.0
8424.5
9765.5
12006.3
1339.0
1269.2
1582.1
1887.4
Chg. in Working Capital
-403.0
-2107.7
-1927.7
-2099.4
Cash Flow from
Operating
6059.0
6508.0
7955.1
9993.4
-2708.0
-4579.6
-5000.0
-5000.0
42.0
0.1
0.0
0.0
-593.0
0.0
0.0
0.0
Cash Flow from
Investing
-3183.0
-4451.3
-5000.0
-5000.0
(Decr)/Incr in Debt
-1768.0
68.4
385.5
165.6
0.0
341.7
0.0
0.0
-1237.0
-1545.8
-1545.8
-1545.8
-2886.0
-1611.7
-1160.3
-1380.2
2507.0
2952.0
4746.8
8360.0
Y/E March
Profit before tax &
Extraordinary Items
Depreciation &
Amortization
(Incr)/ Decr in Gross
PP&E
(Incr)/Decr In
Intangibles
(Incr)/Decr In WIP
(Decr)/Incr in Share
Capital
Dividend
Cash Flow from
Financing
Cash at the End of the
Year
Source: Company, Sushil Finance Research Estimates
May 26, 2011
15
Cadila Healthcare Ltd.
Rating Scale
This is a guide to the rating system used by our Equity Research Team. Our rating system
comprises of six rating categories, with a corresponding risk rating.
Risk Rating
Risk Description
Predictability of Earnings / Dividends; Price Volatility
Low Risk
High predictability / Low volatility
Medium Risk
Moderate predictability / volatility
High Risk
Low predictability / High volatility
Total Expected Return Matrix
Rating
Buy
Accumulate
Hold
Sell
Neutral
Not Rated
Low Risk
Over 15 %
10 % to 15 %
0% to 10 %
Negative
Not
Applicable
Returns
Not Applicable
Medium Risk
Over 20%
15% to 20%
0% to 15%
Negative
Not
Applicable
Returns
Not Applicable
High Risk
Over 25%
20% to 25%
0% to 20%
Negative
Not
Applicable
Returns
Not Applicable
Please Note
Recommendations with “Neutral” Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses).
Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we
have enhanced our return criteria for such stocks by five percentage points.
Additional information with respect to any securities referred to herein will be available upon request.
This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, recirculated, published in any media, website or otherwise, in any form or manner, in part or as a whole,
without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use,
disclosure or public dissemination of information contained herein is prohibited. This report is to be used only
by the original recipient to whom it is sent.
This is for private circulation only and the said document does not constitute an offer to buy or sell any
securities mentioned herein. While utmost care has been taken in preparing the above, we claim no
responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use
thereof and the investors are requested to use the information contained herein at their own risk.
This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell
any security. It does not purport to be a complete description of the securities, markets or developments
referred to in the material. The information, on which the report is based, has been obtained from sources,
which we believe to be reliable, but we have not independently verified such information and we do not
guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice.
Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers
and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in
the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information
contained herein prior to the publication thereof.
May 26, 2011
16