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Solid result; Outlook remains intact

Cadila Healthcare is India’s leading vertically integrated pharmaceutical company. With its presence across the value chain, it manufactures finished dosage forms, active pharmaceutical ingredients, animal healthcare products and wellness products.

* Revenue grew 2.5% YoY, largely driven by strong growth in domestic formulation business (+14.7% YoY) partially offset by decline in US formulations (-14.3% YoY; ~43% of total revenue) in Q4FY21.

* Although gross margins declined 137bps YoY, EBITDA improved 8.1% YoY and EBITDA margin expanded 115bps YoY to 22.2%, aided by lower other expenses and R&D expenses. PAT grew 73.2% YoY in Q4FY21.

* Solid performance in the domestic formulation business and robust product pipeline remains key catalysts. Additionally, cost optimization and higher traction in the US business should drive growth further. We reiterate our BUY rating on the stock with a revised target price of Rs. 730 based on 26x FY23E EPS.

Robust performance in Domestic formulation business

In Q4FY21, consolidated revenue rose 2.5% YoY to Rs. 3,847cr. Domestic formulation business improved 14.7 % YoY to Rs. 1,023cr (~47% of revenue) supported by robust performance in Consumer wellness and Animal health business, up 18.1% YoY to Rs. 1,772cr. Human health business grew ~15% YoY, while Consumer wellness business registered growth of ~22% YoY during the quarter. The growth was partially offset by decline in US formulation business (-14.3% YoY) to Rs. 1,509cr. Additionally, emerging market and API business performed well with 45.5% YoY and 19.9% YoY respectively.

Margins improved on strong operating leverage

Gross margin contracted 137bps YoY to 65.1% impacted by higher cost of sales. However EBIDA margin expanded by 115bps YoY to 22.2%, benefitted by lower other expenses as a % of sales 230bps to 27.0% and further supported by lower R&D expenditure. In line with operational performance, Reported PAT surged 73.2% YoY to Rs. 679cr, supported by lower interest expenses -71.8% YoY in Q4FY21.

Key concall highlights

* Company continued to strengthen its pipeline with current pipeline comprising of 35 approved ANDAs taking cumulative total to 248 with USFDA as of Mar 2021. Company filed total 22 ANDAs with total regulatory ANDAs reached to 412. Notably, Management intends to launch 30 to 35 products in US market in FY22.

* Management is still waiting for resolution for Moaiya facility from USFDA.

* Virafin has been added to portfolio to treat moderate infection in adult COVID-19 patients during the quarter.

* As of FY21, Net debt stood at ~Rs. 3,500cr vs. ~Rs. 7,000cr in FY20 mainly supported by QIP and preferential issue to promoters during the year.

* Company received approval from USFDA to market Fluphenazine Hydrochloride tablets (used for mental ailments) in US market. Company also planning to start trial for COVID-19 vaccine for children age between 5-10 and 12-18 years.

Valuation

Outlook remains promising on the back of upward traction in domestic formulation business and robust new launches in injectable and generic products. Additionally, operating leverage and sharp reduction in debt should support company’s outlook in upcoming period. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 730 based on 26x FY23E EPS.

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