Below-par Performance on Weak Domestic & US Biz; New Launches to Aid Growth
Led by weak domestic and US business, Cadila Healthcare (CDH) has delivered a lower-thanexpected performance in 1QFY20. Reported Sales and PAT came in at Rs35bn (+21% YoY and -6% QoQ; led by full quarter sales contribution from acquired Heinz India in consumer biz) and Rs3bn (-34% YoY and QoQ), respectively. While EBITDA came in at Rs6.3bn (-2% YoY and -21% QoQ), EBITDA margin fell to 18.1%. US business declined by 23% QoQ to US$197mn due to weak sales in key products i.e. gTamiflu/gAndrogel/Levorphanol and flat base business. India business grew by a muted 6% YoY due to portfolio rationalisation. Consumer Wellness witnessed 370% YoY led by consolidation of acquired Heinz India business. Europe and API sales declined by 23% and 37% YoY, respectively while JV and EM business grew by 9% YoY and 12% YoY. Adjusted for the one-time impact of Rs700mn in other expenses (stamp duty paid for merger of WellnessKraft biz, consultation fees for Kraft biz and certain one-time donations), CDH’s EBITDA and PAT came in at Rs7bn and Rs3.58bn, while EBITDA margin came in at 20%. Gross profit stood at Rs22.4bn (+17% YoY and -5% QoQ), while gross margin declined by 190bps YoY (+110bps QoQ) to 64%. Gross margin remained steady due to weak sales of low margin AndroGel AG sales in the US, while decline in EBITDA margin is attributable to lower US sales and higher expenses. We maintain our BUY recommendation on the stock with a revised Target Price of Rs300 (from Rs350 earlier).
Key Results Highlights
US Biz (40% of Sales): US business grew 7% YoY to US$197mn, while 23% QoQ decline is attributable to 90% fall in sales of gTamiflu and gAndroGel, 25% decline in specialty drug Levorphanol (~US$8-10mn) and flattish base portfolio (~US$186mn). As per the Management, Leverphanol and AndroGel AG contributed US$125mn in FY19, while gAndroGel AG has been discontinued. CDH is expecting to offset weak sales in specialty product Levorphanol by developing of 505 (b)(2) products (15 in pipeline; 1 ready for NDA submission), in-licensing specialty products and M&A in specialty space. It expects US business (generics ex-specialty and AG) to grow in single digit in FY20E (generic business at US$800mn in FY19) vs. earlier expectation of US$900mn.
Outlook & Valuation
We expect gradual improvement in domestic business, as the Company is still in the process of restructuring/rationalisation of the business. While Generic-Generic biz (10% of India sales) is facing weak growth due to disruptions in the market, CDH has guided for a muted growth for the US business owing to pending US FDA issues at Moraiya plant. Hence, downwardly revising our PAT estimates by 10% and 8% for FY20 and FY21 and target multiple to 15x (from 16x earlier) owing to OAI status on Moraiya. We see the risk-reward for the stock attractive at 14.0x/11.6x FY20E/FY21E earnings, as the stock has corrected in the recent times (21% during last three months), despite major sales contribution from high margin India business. OAI status on Moraiya plant and further escalation to WL (warning letter) is a key overhang on the stock. Nonetheless, we maintain our BUY recommendation on the stock with a revised Target Price of Rs300 (from Rs350 earlier).
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