IGI Logo

Buy Cadila Healthcare Ltd For Target Rs.670

Domestic Formulations drive earnings

Comprehensive approach to sustain profitability

* CDH’s 1QFY22 performance was in line with our expectations, led by strong growth in Domestic Formulations (DF), owing to its COVID-related product portfolio, but was offset to some extent by higher than expected price erosion in the US. Its in-licensing and niche product portfolio for the US are shaping up well, with benefits expected to accrue from FY23.

* We reduce our FY22E/FY23E EPS estimate by 5%/6% to reflect: a) higher price erosion in the US, b) expected competition in Mesalamine products, and c) margin expansion aided by cost optimization. We value CDH at 25x its 12-month forward earnings to arrive at our TP of INR670. We remain positive on CDH on account of: a) robust launch momentum in the US and DF, b) build-up of the complex product pipeline of own/in-licensed products, and c) completion of remediation at Moraiya. We maintain our Buy rating. The vaccine opportunity in India is not built into our estimates and can provide a further upside, post approval.

DF outperforms while the US underperforms in 1QFY22

* Sales grew 10.6% YoY to INR40.3b (est. INR41b), led by India/LatAm. India sales (50% of sales), comprising of DF and Consumer Wellness, rose 43% YoY to INR19.4b. Within India, DF sales grew 64% YoY to INR13.6b. LatAm/EM sales rose 17% YoY to INR2.8b (7% of sales). API sales grew 4% YoY to INR1.4b (3% of sales).

* US sales declined by 11% YoY to INR15b (37% of sales).

* Gross margin was steady at 65.8% on a YoY basis.

* EBITDA margin expanded at a higher rate (80bp YoY) at 23.2%. This was largely due to lower employee cost (down 120bp YoY as a percentage of sales), offset by higher other expenses (up 80bp as a percentage of sales).

* EBITDA grew 14% YoY to INR9.3b (est. INR9.2b).

* PAT grew 24% YoY to INR5.7b (est. INR6b) due to a lower tax rate at 18.8% v/s 20.8% in 1QFY21.

Highlights from the management commentary

* With 30 ANDA launches, CDH has guided at low single-digit growth in the US business.

* CDH aims to achieve USD250m in revenue from Injectables in the US market over the next 3-4 years. In addition to in-house product development, inlicensing deals would enhance the product portfolio in the Injectable segment.

* The management said it will launch 30-35 products in the India market.

* These cost saving initiatives are expected to drive an 80-100bp margin improvement over the next 12-15 months.

* CDH has submitted a COVID-19 vaccine application for 2mg, three doses and 3mg, two doses. Data request from DCGI will be submitted this week, which would complete most of the requirements for this application.

Valuation and view

* We reduce our FY22E/FY23E EPS estimate by 5%/6% to reflect the impact of higher price erosion in the US, offset to some extent by CDH’s cost saving initiatives.

* We continue to value CDH at 25x its 12-month forward earnings to arrive at our TP of INR670.

* We expect 12% earnings CAGR on the back of 16% sales CAGR in DF (considering the muted growth in FY21) and steady US sales (despite increased competition), aided by an 110bp margin expansion from new initiatives in manufacturing, and reduced financial leverage. The vaccine opportunity in India is not built into our estimates and can provide a further upside, post approval. We maintain our Buy rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

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