Controlled opex led better profitability
On track to build differentiated portfolio for US/EM markets
* CDH delivered in-line performance for 1QFY21. The decline in domestic formulation (DF) and consumer healthcare was more than offset by lower operating cost. This resulted in 20%/26% YoY EBITDA/PAT growth v/s 4% YoY revenue growth. CDH is progressing well to build Injectable/vaccine/biosimilars as additional levers of growth for the next 2-3 years.
* We have raised our earnings estimates for FY21/FY22E by 10%/9% to reflect better operating leverage/growth outlook for DF. We continue to value CDH at 21x 12M forward earnings to arrive at TP of INR460. We remain positive on CDH due to robust ANDA pipeline (including injectables/transdermals), renewed strategy in DF and completion of remediation measures at Moraiya. Maintain Buy.
US/EM drives revenue growth; lower opex in India aids margins
* 1QFY21 sales at INRINR36.4b (v/s est. INR38.7b), was up 4%YoY.
* Sales growth was largely led by (a) US sales (45% of sales), up 19% YoY to INR16.2b, (b) LATAM/EM revenues (7% of sales), up 8% YoY to INR2.4b, and (c) API revenues (4% of sales), up 89% YoY.
* India revenue (41% of sales) comprising of DF, consumer and animal health was down 11% YoY to INR14.9b, impacting overall growth. Within India, DF was down 11% YoY to INR8.3b.
* Gross margin at 65.7%, expanded 170bp YoY due to better product mix.
* EBITDA margin expanded at better rate of 230bp YoY to 22.4% due to lower other expenses (-120bp YoY as % of sales). This was partially offset by higher employee cost (+50bp YoY as % of sales).
* EBITDA at INR8.2b (v/s est. INR8b) was up 16% YoY.
* PAT at INR4.5b (v/s est. INR4.6b) grew 26% YoY at a better rate than EBITDA due to lower interest outgo.
Highlights from management commentary
* Potential injectable sales to the US could be ~USD150-200m by FY23-24 on the back of 45 ANDAs filed and 30 under development.
* CDH re-launched 1 injectable from Liva, after site transfer from Moraiya.
* CDH completed remediation at Moraiya and awaits feedback from the USFDA for desktop audit.
* CDH reduced net debt to INR52b (from INR67b) at end-FY20 due to better working capital management. However, considering some reversals, CDH has guided for net debt reduction of INR10b by FY21.
Valuation and view
* We have raised our EPS estimates for FY21/FY22E by 10%/9% to reflect margin improvement and pickup in DF sales. We expect 21% earnings CAGR on the back of 8% sales CAGR in the US (compared to flat US sales for FY20), 7% sales CAGR in DF (considering muted growth in FY21), 23% sales CAGR in EMs, supported by 280bp margin expansion and reduced financial leverage. We continue to value CDH at 21x (in line with its 3-year average) 12M forward earnings to arrive at TP of INR460. Maintain Buy.
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