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Modest operational beat; downgrade to Hold

* Cadila’s revenue was in line with our estimates but EBITDA beat our estimates by 7%. The beat was driven by lower-than-expected other expenses, partially offset by lower gross margin. Adj. PAT of Rs7.5bn beat our estimates by 60% due to recognition of DTA.

* We downgrade the stock to Hold as we believe current price amply captures medium-term upside. We maintain our TP of Rs655 which represents 20x on our core FY23E EPS and Saroglitazar NPV of Rs90 and Covid vaccine NPV of Rs50.

* We cut our core earnings estimates for FY22 and FY23 by 2%/3% to reflect the weakness in the US business. Our revenue estimates are lowered to reflect the divestiture of animal health business starting from Q2FY22 and lower US revenue.

* We raise our Covid vaccine NPV to Rs50 per share from Rs45 per share earlier, as we refine our pricing and margin assumptions depending on the channel such as government, private market and export market.

Good segmental performance except for US:

India formulations business grew 15% yoy without much contribution from the Covid portfolio. Europe posted decent revenue growth of 8% yoy. Other segment such as EM + LATAM posted strong growth of 46% yoy. Consumer and Animal health grew 22-25% yoy. API sales rebounded sharply and grew 20% yoy. US was the only segment to post a decline in revenue (-14% yoy and -6% qoq). Management attributed the decline to: 1) decline in total Rx in Asacol, and 2) price erosion.

Guidance reaffirmed:

Management reaffirmed US product launch guidance of 30+ products, with an aspirational target of 40-45 launches. Management also reaffirmed core business margin trajectory of ~22%+. Specialty portfolio on track: The company has received green light from the USFDA to conduct Saroglitazar Phase-3 trial for PBC and Phase-2b trial for NASH. The PBC trial will be conducted in 192 patients and will start in August with probable filing in CY23 and launch in FY25. Meanwhile, the company also expects a read-out from it Phase 2 trial for NAFLD indication in Q3FY22. We maintain our NPV calculation for PBC and NASH indication at Rs90 per share.

Weakness in Asacol prompted earnings revision:

According to Bloomberg data, Asacol Total Rx have gone down by ~13% yoy in Q4, while Cadila has maintained its market share. A similar trend is also visible in April, suggesting another soft quarter for the US business. Asacol is the company’s most profitable product with estimated earnings contribution of ~Rs8 per share. To reflect for the softness in total Rx, we have lowered our FY22 and FY23 earnings estimates by 2% and 3%, respectively.

Revise vaccine NPV modestly upward:

We raise our Covid vaccine NPV to Rs50 per share from Rs45 per share earlier. Our vaccine model for adults and adolescents suggests Cadila’s capacity of ~10mn doses/month will be likely absorbed in the domestic market at least for the next one year. Of the total production of ~100mn doses in FY22, 30mn could be purchased by the central govt. at Rs150 per dose, while the rest could be sold at Rs300 per dose in the private market and Rs500 per dose in the export market.

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