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Growth recovery likely from FY21, valuations attractive
We upgrade Cadila Healthcare (Cadila) to BUY from Add considering attractive valuations (14.1xFY21E) after recent correction in the stock price. We believe over 20% fall has completely factored-in the bear case scenario (warning letter) for Moraiya facility and an expected decline in FY20 earnings. We estimate 10.9% drop in FY20E EPS due to expectation of zero approvals from Moraiya, remedial expenses and revenue decline from large products (generic Lialda and AndroGel) with higher competition. The company expects strong launch momentum in the US (>35 in FY20) to continue, which would help sustain the high base of US sales (I-sec: 4% decline), while India business growth is likely to be in-line with the industry. Upgrade to BUY.
* Current valuations factor-in muted near-term outlook:
We believe the recent correction in the stock price largely factors-in the expectation of a negative outcome on Moraiya facility, decline in FY20 EPS and subdued near-term outlook for the US business. The decline would be mainly due to high base of FY19 with generic Lialda and AndroGel, which contributed ~20% of FY19 EPS. Excluding these products, we expect 5.0%/13.5% growth in FY20/21 assuming no product approval from Moraiya facility. Rising proportion of India business (pharma + wellness) would provide cushion to margins and valuations in our view. Our earnings estimates for FY20-21 are 13.5%/11.8% lower than Bloomberg consensus estimates and valuations look reasonable on our conservative estimates.
* Impact of negative outcome on Moraiya facility to be insignificant:
Moraiya facility contributes ~40-45% of US sales (20-22% of total sales) and has 31 pending ANDAs out of total 126 pending ANDAs (incl. 20 tentative approvals). This facility has been issued form 483 with 14 observations. If it escalates to warning letter or OAI status, the existing business would continue with a delay in new approvals. The company undertook temporary shutdown of this facility as part of remediation and has restarted manufacturing oral solid products. Cadila has started doing site transfer of injectables to other owned sites, which would take 6-9 months.
We expect revenue and EBITDA CAGRs of 8.6% and 6.1%, respectively, over FY19-21E on high base of FY19 and zero approvals from Moraiya. We expect EPS to remain flat over FY19-21E on a high base and affected by Heinz acquisition with higher interest cost. We cut revenue/EPS estimates by 0-1/2-3%.
* Valuations and risks:
On attractive valuations, we upgrade the stock to BUY from Add with a revised target price of Rs282/share based on 17xFY21E EPS (earlier: Rs292/share). Key downside risks: Delay in the launch of high-value products in the US and regulatory hurdles.
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