IGI Logo

High base, weak margins dent Q3 performance

Cadila Healthcare (Cadila) reported Q3FY22 results operationally lower than our estimates, although in line on the net profit front. Revenue (ex-animal health business and other operating income) fell 1.3% YoY to Rs36.6bn (I-Sec: Rs36.7bn) with the decline in India and US revenues largely offset by higher API and JV & Alliances businesses. US sales were flat QoQ, with the impact of continued price erosion and decline in mesalamine products nullified by volume gains and new launches. Adj. EBITDA margin stood at 20.6%, lower than I-Sec estimate of 22.6%. Adjusted PAT (ex-Animal health business) was flat YoY (-16% QoQ) at Rs5.0bn (I-Sec: Rs5.0bn). Successful commercialization of ZyCoV-D vaccine remains a near-term trigger, although not a significant valuation driver. Recent correction in the stock price makes valuations reasonable. Maintain ADD

Business outlook: India revenue grew 17% YoY (excluding, generic business, Covid portfolio and divested brands), mainly due to market share gains in key segments. US sales were flat QoQ at US$202mn (I-sec: US$200mn), as the impact of continued price erosion and decline in mesalamine products was offset by volume gains and new launches. Ramp-up in transdermal products, injectable and high value launches would facilitate sales pick-up from FY23, but USFDA resolution on Moraiya facility remains critical. Consumer Wellness grew by a mere 1.7% YoY and API sales were up 25% YoY. Gross margin shrank 360bps YoY amid US pricing pressure and lower margins in wellness besides cost inflation. Adj. EBITDA margins shrank 80bps YoY; lower gross margins were largely offset by cost-control initiatives. We expect margins to remain stable at ~22-22.5% over FY22E-FY24E.

Key concall highlights: 1) 10 million ZyCoV-D vaccines expected to be supplied by Q1FY23. 2) FY23 guidance – less than 5% growth the US with 6-7% price erosion; other geographies expected to grow in double digit. 3) Aspiration to reach US$1bn US sales by FY24 with a few big (+US$40mn each) launches and transdermal approvals. 4) Expects cost-optimization measures to drive 80-100bps margins improvement in FY23. 5) The company has launched 12 Biosimilars in India; Rs6bn of India biosimilar revenues expected to double in next three years.

Outlook: We expect revenue/EBITDA/PAT CAGRs of 4.4/4.9/4.4% over FY21- FY24E. Lower earnings growth can be attributed to lower revenue growth and US price erosion, though interest cost will be reducing. The company reduced net debt substantially (through divestment of animal health business) to Rs4bn from Rs35bn in FY21. Ramp-up in ZyCoV-D vaccine could provide upside in the near term.

Valuations and risks: We cut our earnings estimates by 2.5-3% over FY22-24E to factor in earnings variances and the delay in vaccine opportunity. Recent correction in stock price makes valuation reasonable. We thus maintain ADD with a revised TP of Rs452 based on 20x Sep23E EPS and an NPV of Rs7.5/share for ZyCoV-D. Key downside risks: Competition in US and regulatory hurdles.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer