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* We reiterate Buy on Cadila with an unchanged TP of Rs655 post a steady Q3. We also maintain our FY22/23 estimates, which includes upside from Covid-19 vaccine Zycov-D, partially offset by higher R&D expenses related to Saroglitazar trials in US.

* Revenue of Rs37.9bn and EBITDA of Rs8.1bn were largely in line with our estimates. PAT of Rs5.3bn beat our estimates, aided by lower-than-expected tax expenses and higher than expected other income.

* Core business is expected to gain momentum as launches in US and India accelerate in FY22. Cadila reaffirms cost efficiency guidance of ~100bps. Surprisingly, R&D expenses are likely to be in the range of 8-9% despite Saroglitazar clinical trial progress in US.

* In our SOTP, the core business contributes 80% (Rs520/share, valued by us at 20x forward P/E), PBC & NASH add 14% (Rs90, NPV) and ZyCov-D accounts for the remaining 7% (Rs45, NPV).

Steady Q3: Revenue grew 4% yoy to Rs37.9bn, driven by strong growth across segments, except US and API. India formulations business grew 21% yoy, aided by improved demand after the easing of lockdown restrictions. Europe posted strong revenue growth of 24%, albeit on a low base. Other segments such as EM + LATAM and Consumer & Animal health grew 11 and 17%, respectively. US business fell 4% yoy. EBITDA grew 16% yoy and EBITDA margin improved ~200bps yoy to 21.3%. EBITDAM expansion was driven by lower other expenses as promotion expenses in branded markets remained low due the pandemic. PAT grew 41% yoy to Rs5.3bn on higher EBITDA and lower tax expenses.

Guidance represents upside to our base case estimates: Management guided for ~40 generic launches per annum in US, including certain limited competition products. Cadila’s new chemical entities (NCEs) will likely drive significant growth in India with the lead molecule, Saroglitzar, expected to be Rs2.5bn (~6% of current India revenue) brand and 4-5 additional products with potential to become Rs0.5bn brands each. R&D expense is expected to be in the range of 8-9% despite the US clinical trials related to Saroglitazar (vs. our initial estimate of 10-12%). On Covid-19 vaccine, management believes that it could be a long-term opportunity as even the most successful vaccine programs historically have taken at least 10 years. Additionally, vaccine demand from Emerging markets already exceeds the company’s supply capacity. All these factors provide an upside to our base case estimates.

Reiterate Buy: The stock is trading at a 1-year forward P/E of 16.4x on our consolidated forecast, and 21x on core earnings in line with the historical average. Our Rs655 TP includes core business value of Rs520 (20x forward P/E), Saroglitazar NPV of Rs90 and ZyCoV-D upside of Rs45. Key downside risks are 1) higher-than-expected competition in Mesalamine franchise; 2) adverse regulatory outcome on plants; 3) failure to get FDA approval for Saroglitazar.

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