2QFY13 Result Update
Institutional Equities
Cadila Healthcare
8 November 2012
Reuters: CADI.BO; Bloomberg: CDH IN
Performance Below Expectations
HOLD
Following higher R&D expenses, Cadila Healthcare’s (CHL) 2QFY13 margins
(excluding forex losses) were 190bps/260bps below our/Bloomberg consensus
estimates, respectively, which coupled with higher tax drove adjusted PAT to
Rs1.5bn, 22%/28% below our/Bloomberg consensus estimates, respectively. We
have adjusted our FY13E earnings downwards by 15% factoring in 1HFY13 forex
losses (which we believe are largely realised) and a higher tax rate (26% versus
23% earlier), while our FY14E earnings estimate has been marginally revised
downwards by 3% due to a higher tax rate. With minimal hedges (US$19mn
outstanding), we believe forex losses are likely to decline going forward and
focus will resume on core business performance, which largely depends on
product approvals in the US. We have retained our Hold rating on the stock with a
revised TP of Rs910 (20xFY14E revised EPS of Rs45.5) from Rs923 earlier.
2QFY13 performance below expectations: CHL’s 2QFY13 results were below
expectations, as higher R&D spending (7.6% in 2QFY13; FY13 guidance maintained at
6%-7%) and forex losses (largely realised) of Rs624mn hurt margins, which stood at
14.9%, significantly below estimates. Excluding forex loss, margins stood at 19%,
190bps/260bps below estimates. Revenue growth was in line, as domestic business
outperformed with a 28% YoY growth (18% excluding Biochem) even as US business
was largely flat on constant currency basis. Tax rate shot up to 32% of PBT, and the
management expects it to settle at 25%-27% in FY13E (as against 22% earlier).
US business ramp-up vital for stock’s performance: With the worst behind it, we
believe CHL’s re-rating largely hinges on ramp-up in its US business. The company has
witnessed a sharp spurt in drug approvals (10 approvals in 2QFY13 including five for
injectables) post clearance of Moraiya facility by the USFDA. Drug pipeline also looks
promising with quite a few interesting opportunities (not factored in our estimates due to
timeline/litigation uncertainty) – Prevacid ODT (ulcer drug; US$300mn; 30-month stay
expired in October 2012), Lialda (ulcer drug; US$200mn; trials done in October 2012),
Toprol XL (hypertension drug; US$1.2bn; four other players in the market) and Astelin
(nasal; US$250mn, Apotex already in the market).
We have revised earnings, TP marginally downwards: Factoring in 1HFY13 forex
losses (which we think are largely realised) and a higher tax rate, we have revised our
FY13E/FY14E EPS downwards by 15%/3%, respectively. We have retained our Hold
rating on CHL with a revised TP of Rs910, valuing the stock at 20xFY14E EPS.
Y/E March (Rsmn)
Net revenue
Total material costs
% of revenue
Staff costs
% of revenue
R&D expenses
% of revenue
Other expenses
% of revenue
EBITDA
EBITDA margin (%)
EBITDA margin (excl.forex) (%)
Other income
Interest costs
Depreciation
PBT
Tax
Minority Interest
Reported PAT
PAT ex forex.
2QFY12
12,364
3,906
31.6
1,803
14.6
847
6.9
3,438
27.8
2,371
19.2
20.7
110
769
375
1,337
235
(75)
1,027
1,620
1QFY13
15,944
5,252
32.9
2,298
14.4
873
5.5
4,066
25.5
3,456
21.7
21.5
95
454
434
2,663
654
(61)
1,948
2,035
2QFY13
15,476
5,711
36.9
2,283
14.8
1,172
7.6
4,004
25.9
2,306
14.9
19.0
65
405
432
1,534
494
(88)
951
1,466
YoY (%)
25.2
46.2
26.6
38.4
16.5
(2.7)
(427bps)
(173bps)
(47.3)
15.2
110.1
(7.3)
(9.5)
Sector: Pharmaceuticals
CMP: Rs859
Target Price: Rs910
Upside: 6%
Praful Bohra
praful.bohra@nirmalbang.com
+91-22-3926 8175
Key Data
Current Shares O/S (mn)
204.7
Mkt Cap (Rsbn/US$bn)
176.1/3.3
52 Wk H / L (Rs)
966/620
Daily Vol. (3M NSE Avg.)
104,589
Price Performance (%)
1M
6M
1 Yr
Cadila
4.9
15.8
12.7
Nifty Index
Source: Bloomberg
0.2
12.6
9.0
QoQ (%)
(2.9)
8.7
(0.6)
34.2
(1.5)
(33.3)
(677bps)
(254bps)
(10.8)
(0.5)
(24.4)
(51.2)
(28.0)
Source: Company, Nirmal Bang Institutional Equities Research
Please refer to the disclaimer towards the end of the document.
1HFY12
24,821
7,526
30.3
3,418
13.8
1,632
6.6
6,851
27.6
5,395
21.7
22.2
174
880
723
3,965
521
(120)
3,325
3,780
2HFY13
31,421
10,963
34.9
4,581
14.6
2,045
6.5
8,070
25.7
5,762
18.3
20.2
160
859
867
4,197
1,148
(150)
2,899
3,502
YoY (%)
26.6
45.7
34.0
25.3
17.8
6.8
(339bps)
(200bps)
(8.0)
(2.4)
19.9
120.5
24.9
(12.8)
(7.4)
Institutional Equities
Conference call highlights
1) US business: CHL is targeting revenue of over US$350mn from the US in FY14E (our estimate US$356mn).
Most of the drugs recently approved by the USFDA (10 in 2QFY13) are likely to be launched over the next
two quarters. The company also plans to launch one controlled substance product from Nesher in 3QFY13. In
2QFY13, CHL filed three ANDAs (abbreviated new drug applications) in the US, including one for an
injectable product. The company expects USFDA inspection for its transdermals facility soon. It currently has
two transdermal filings and expects to ramp it up next year.
2) Domestic business: Domestic growth was largely volume-driven, with new products contributing only 2%3%. Cardiology and diabetec segments outperformed, growing over 20% each. Margins improved in Biochem
compared to a year ago and CHL expects further improvement.
3) Brazil business: Revenue decline of 26% YoY was on account of the staffs’ strike at the country’s drug
regulator. CHL filed for five products in Brazil and two in Mexico during the quarter and expects revenue to
normalise from 3QFY13.
4) Zydus Hospira: The joint venture (JV) successfully completed USFDA inspection. Taxotere sales were
ramped up during the quarter, but are unlikely to sustain. The company is in discussions with Hospira to
include additional 8-10 oncology products (with a lower margin than the earlier six products) for the JV.
5) Zydus Nycomed: The JV is progressing as per expectations and CHL expects sales from 14 newly added
APIs to start from 4QFY13/1QFY14.
6) Zydus Wellness: The company is witnessing double-digit growth in Sugarfree and Everyuth products, while
Nutralite sales are stagnant.
7) Abbott partnership: CHL expects revenue to commence from the next quarter.
8) Margins: CHL expects margins to improve by 50bps-100bps in FY14E excluding forex losses. We have
factored in 22% margins for FY14E, 240bps above our FY13E estimate, which stands at 19.6% due to
inclusion of forex losses. R&D costs are likely to normalise in 2HFY13, with FY13E R&D guidance maintained
at 6%-7%.
9) Debt: CHL expects to incur a capex of Rs6.5bn (mainly on biologics and formulations facility), in FY13E,
owing to which net debt at Rs20.4bn (net debt/equity ratio of 0.76x) is expected to remain high. Capex is
likely to moderate to Rs4bn and the company expects some debt reduction thereafter.
Exhibit 1: Change in our earnings estimates
FY13E
(Rsmn)
Revenue
EBITDA
EBITDA margin (%)
Reported PAT
FY14E
Old
New
Change (%)
Old
New
Change (%)
65,326
13,782
21.1
7,881
65,326
12,822
19.6
6,732
(7.0)
(147bps)
(14.6)
73,635
15,897
21.6
9,548
73,635
16,185
22.0
9,306
1.8
39bps
(2.5)
Source: Nirmal Bang Institutional Equities Research
Exhibit 2: Financial summary
Y/E March (Rsmn)
Revenue
YoY (%)
EBITDA
EBITDA (%)
Adj PAT
YoY (%)
Fully DEPS
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)
FY10
FY11
FY12
FY13E
FY14E
36,868
25.9
8,086
21.9
5,091
57.5
37.3
35.6
24.6
23.2
22.8
46,207
25.3
10,262
22.2
7,110
39.6
34.7
37.4
28.5
24.7
17.9
51,487
11.4
10,329
20.1
6,172
(13.2)
30.1
25.6
20.9
28.5
18.7
65,326
26.9
12,822
19.6
6,732
9.1
32.9
23.1
21.6
26.1
15.3
73,635
12.7
16,185
22.0
9,306
38.2
45.5
26.2
24.9
18.9
11.9
Source: Company, Nirmal Bang Institutional Equities Research
2
Cadila Healthcare
Institutional Equities
Exhibit 3: Revenue break-up
(Rsmn)
Domestic
Formulations
APIs
Wellness
Animal health & others
2QFY12
6,100
4,700
68
879
453
1QFY13
7,454
5,818
108
1,033
495
2QFY13
7,637
6,018
116
965
538
YoY (%)
25.2
28.0
70.6
9.8
18.8
QoQ (%)
2.5
3.4
7.4
(6.6)
8.7
1HFY13
12,046
9,274
134
1,793
845
2HFY13
15,090
11,835
224
1,998
1,033
YoY (%)
25.3
27.6
67.2
11.5
22.2
Exports
Formulations
US
Europe
Japan
Brazil
Emerging markets
APIs
Animal health & others
JVs
Total
5,540
4,893
3,070
619
120
655
429
563
84
750
12,390
6,718
5,952
3,592
854
139
645
721
650
116
1,295
15,466
6,510
5,820
3,674
762
143
487
754
588
102
1,300
15,447
17.5
18.9
19.7
23.2
19.2
(25.7)
75.9
4.5
21.2
73.4
24.7
(3.1)
(2.2)
2.3
(10.8)
2.8
(24.5)
4.6
(9.5)
(12.4)
0.4
(0.1)
10,357
9,029
5,463
1,388
232
1,125
821
1,243
84
1,877
24,279
13,228
11,772
7,266
1,617
282
1,131
1,476
1,238
218
2,595
30,913
27.7
30.4
33.0
16.5
21.5
0.5
79.7
(0.4)
159.6
38.3
27.3
Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 4: Actuals versus our estimates, Bloomberg estimates
(Rsmn)
Revenue
EBITDA
EBITDA margin (%)
EBITDA margin excl, forex impact (%)
Reported PAT
PAT (excl. forex impact)
Actuals
Our estimates
Variation (%)
Bloomberg cons. est.
Variation (%)
15,476
2,306
14.9
19.0
951
1,466
15,976
3,334
20.9
20.9
1,881
1,881
(3.1)
(30.8)
(597bps)
(191bps)
(49.4)
(22.1)
15,676
3,393
21.6
21.6
2,038
2,038
(1.3)
(32.0)
(674bps)
(269bps)
(53.3)
(28.1)
Source: Company, Nirmal Bang Institutional Equities Research
Rating history
Date
1 November 2011
11 November 2011
22 December 2011
12 January 2012
8 February 2012
19 March 2012
16 April 2012
11 May 2012
9 July 2012
7 August 2012
4 October 2012
3
Rating
Sell
Sell
Hold
Hold
Sell
Sell
Sell
Hold
Hold
Hold
Hold
Market price (Rs)
758
760
701
678
660
712
702
759
774
909
858
Target price (Rs)
743
737
737
737
629
674
674
831
831
923
923
Cadila Healthcare
Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
HOLD 0-15%
SELL < 0%
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4
Cadila Healthcare