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India, EMs drive earnings

NCEs / Complex Generics / Vaccines progressing as expected

* Cadila Healthcare (CDH) posted in-line 3QFY21 results, led by a superior performance in India/EM, partly offset by a dip in US sales. CDH is progressing well on NCE programs and developing complex injectables. It is not only working on developing a vaccine for COVID but is also building manufacturing capacity to meet commercial requirements once the vaccine is approved.

* We tweak our EPS estimates for FY21/FY22/FY23E to reflect a) superior growth in the Specialty sub-segment in the Domestic Formulation (DF) segment, b) a better outlook for the Consumer Wellness segment, and c) a gradual uptick in growth in the US Generics segment. We value CDH at 22x 12M forward earnings to arrive at TP of INR550. We remain positive on CDH on account of its strong ANDA pipeline (comprising injectables), its NCE portfolio, and outperformance in DF. The vaccine opportunity may be a potential trigger over the medium term. Maintain Buy.

US sales decline drags down performance

* 3QFY21 sales grew 4.3% YoY to INR38b (our estimate: INR38.3b), largely led by India/LATAM. India sales (43% of sales) – comprising the DF, Consumer, and Animal Health businesses – were up 20% YoY to INR16.4b. Within India sales, DF was up 21% YoY to INR11b. EM sales were up 11% YoY (8% of sales).

* US sales declined 4% YoY to INR16b (42% of sales). API sales were down 19% YoY to INR1.3b (3% of sales).

* The gross margin remained largely flat at 65.9% on a YoY basis.

* However, the EBITDA margin expanded 210bp YoY to 21.3%. This was largely led by strong operating leverage – other expenses / employee costs were down 250bp/50bp YoY as % of sales, partly offset by an increase in R&D spend (+100bp as a % of sales).

* EBITDA was up 16% YoY to INR8.1b (our estimate: INR8.3b).

* Adj. PAT grew at a higher rate of 39% YoY to INR5.3b (our estimate: INR5.1b), led by better margins, reduced interest outgo, and lower tax.

* For 9MFY21, revenues / EBITDA / adj. PAT grew 7%/23%/46% to INR112.5b/INR24.9b/INR15.6b.

Highlights from management commentary

* Saroglitazar has been granted a fast-track designation as well as an orphan drug status for PBC treatment in the US. CDH plans to commercialize this product on its own. The PBC market is a USD10b opportunity, and Saroglitazar is expected to be approved for PBC by FY23. CDH hopes to file for NASH in FY24/FY25.

* The new vaccine plant is expected to be ready in 1QFY22, with an annual capacity to produce 120m doses. It is also looking for CMOs to enhance capacity.

* The total investment for the Vaccine program would be INR1.5–2b.

* A weak flu season, delayed offtake by distributors, and the lack of product shortage (dearth of one-time opportunities) impacted the US business in 3Q. CDH has guided for USD210–220m US sales for 4QFY21.

Valuation and view

* We tweak our EPS estimates for FY21/FY22/FY23E to reflect the DF segment’s return on the growth path, better financial leverage, and slower recovery in growth prospects in the US.

* We expect a 19% earnings CAGR over FY20–23 on the back of a) a 5% sales CAGR in the US v/s almost flat US sales over FY18–20), b) an 11% sales CAGR in DF v/s modest growth over FY18–20, and c) a 20% sales CAGR in EM – supported by 230bp margin expansion and reduced financial leverage. We value CDH at 22x (in line with its three-year average) 12M forward earnings to arrive at TP of INR550. Maintain Buy.

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