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Steady quarter; Vaccine is the key trigger

Cadila Healthcare (Cadila) reported Q3FY21 performance largely in line with our estimates with strong India growth aided by COVID-19 portfolio. Total revenue grew 4.8% to Rs38.0bn (I-Sec: Rs38.5bn) supported by India formulations and consumer businesses. EBITDA margin (ex-forex) improved 270bps to 21.4% (ISec: 21.0%) driven by improved gross margin and lower S,G&A expenses. Adjusted PAT increased 46.9% to Rs5.3bn (I-Sec: Rs4.5bn) aided by lower interest cost. The company has strengthened the balance sheet by meaningful net debt reduction to ~Rs38bn, aided by internal accruals and equity raise of Rs10bn in Zydus Wellness (subsidiary). Cadila’s potential COVID-19 vaccine ‘ZyCoV-D’ is progressing well in the phase III trials. Successful launch of this vaccine would provide upside. Maintain HOLD.

* India business was the key growth driver: India formulations business grew 21.2% YoY with recovery in industry growth from COVID-19 impact and launch of Remdesivir for COVID treatment. Consumer wellness business in India also grew strong 15.8% YoY. Animal healthcare grew 17.0% led by strong demand. US revenue dropped 6.2% QoQ to US$214mn due to weak flu season and inventory correction in few products. Ramp-up in transdermal products, injectables and high value launches would help in gradual pick-up in sales. API business segment witnessed a decline of 18.8% YoY on high base. EMs grew 10.9% and Europe business increased 24.3% YoY.

* Margins remain stable: Cadila witnessed 270bps EBITDA margin (ex-forex) improvement on YoY basis to 21.4% (-150bps QoQ). Gross margin improved 100bps YoY (+80bps QoQ) with higher revenue from India business. R&D spend stood at 9.3% of sales vs 8.4% YoY and 7.5% QoQ. We expect the margin to remain stable at 21-22% in FY21E-FY23E. Early resolution of Moraiya facility and high-value launches in the US could provide an upside.

* Outlook: We expect revenue/EBITDA/PAT CAGRs of 6.4/10.5/17.1% respectively, over FY20-FY23E. We expect the earnings growth would be largely driven by steady margin and reduction in interest expense. The company reduced net debt by ~Rs29bn in 9MFY21 to Rs38bn with better working capital management, lower capex and equity raise in Zydus Wellness. This has strengthened the balance sheet materially.

* Valuations and risks: We marginally revise our estimates to factor in lower US sales and reduced interest cost and maintain HOLD rating on the stock with a revised target of Rs490/share based on 22x FY23E EPS (earlier: Rs476/share based on Sep’22E). Key upside risks: successful launch of COVID-19 vaccine in India and other markets and early resolution of Moraiya facility. Key downside risks: Delay in the launch of high-value products and regulatory hurdles.

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