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Superior product mix benefit offset by lower operating leverage
DF sales growth improves; Better traction in US as well
* Cadila Healthcare’s (CDH) renewed strategy is aiding growth in the domestic formulation (DF) segment. Also, its ANDA launch engine remains strong, which in turn is improving growth prospects for the US market.
* We maintain our EPS estimates for FY20/FY21/FY22E. We remain positive on CDH on the back of (a) robust ANDA pipeline including complex products like transdermals, and (b) its changed strategy, which is delivering steady pick-up in DF growth. Reiterate Buy on attractive valuations.
Overall performance in line with estimates
* 3QFY20 sales grew 1.7% YoY to INR36.4b (v/s est. INR34b), led by (a) US sales growth of 16% QoQ to INR16.7b (46% of sales), and (b) India branded formulation growth of 9.6% YoY.
* Gross margin stood at 65.8% and expanded 360bp YoY.
* EBITDA margin came in at 19.1% and contracted 440bp YoY. This was largely due to higher other expenses as % of sales (+400bp YoY) and staff cost as % of sales (+240bp YoY), largely led by integration of the Heinz business.
* EBITDA at INR6.9b (v/s est. INR6.7b) was down 17.5% YoY.
* Adj PAT came in at INR3.8b (in-line) and declined 26.5% YoY.
Highlights from management commentary
* 16% QoQ growth in the US business was led by (a) new products, (b) market share gain in the base business, and (c) favorable seasonality with respect to g-Tamiflu.
* Price erosion was at ~2% in the US market.
* Net debt is at INR65.3b.
* About 3 products were launched in Brazil and 1 in South Africa. Also, doubledigit growth was recorded in major brands driving the EM business in the quarter.
* In the domestic market, CDH grew 12% YoY beating market growth of 9% YoY.
* API growth is expected to be in the range of 8-10% on annualized basis.
Valuation and view
* We expect earnings to form a trough in FY20 and revive over the next 2 years, led by 9% sales CAGR in domestic formulation, incremental business from new launches and better traction in existing product, and improving profitability of consumer wellness segment. We continue to value CDH at 16x 12M forward earnings to arrive at price target of INR317 (from INR298 earlier). Maintain Buy.
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