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Steady Q1; US remains under pressure

Cadila Healthcare (Cadila) reported Q1FY22 performance better than expectation mainly driven by higher India sales, in line with other peers. However, margin beat was much lower vs peers, despite higher India revenue and incremental sales from covid-19 portfolio. US sales were also weak with 4.8% QoQ drop due to price erosion and limited one-time supply opportunities. Total revenue grew 14.5% to Rs40.3bn (I-Sec: Rs38bn) supported by India formulations.

EBITDA margin improved 70bps to 23.2% (I-Sec: 21.2%) driven by higher India sales. Adjusted PAT grew 29.3% to Rs5.9bn (I-Sec: Rs4.8bn) led by higher EBITDA. Cadila’s potential covid-19 vaccine ‘ZyCoV-D’ remains the near term trigger, if approved, but we believe current price already captures the potential upside. Upgrade to REDUCE on recent correction in stock price.

* India business strong, US weakens further: India formulations business grew 63.7% YoY with recovery in industry growth from covid-19 impact, low base and upside from covid-19 related portfolio. Consumer wellness business in India grew at steady 10.2% YoY. However, US revenue dropped 4.8% QoQ to US$197mn vs estimated US$210mn due to pricing pressure, higher competition in some products and lack of one-time opportunities. Ramp-up in transdermal products, injectables and high value launches would help in gradual pick-up in sales but USFDA resolution on Moraiya facility remains critical. API business segment witnessed a growth of 3.9% YoY. EMs grew 16.6% led by volume traction and new launches.

* Higher revenue led to margin beat: Cadila witnessed 70bps EBITDA margin improvement on YoY basis to 23.2% (+40bps QoQ). However, gross margin dropped 60bps YoY (-30bps QoQ) due to decline in US sales. R&D expenditure was stable at 7.5% of sales. We expect the margin to remain stable at ~21-22% over FY22E-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 4.6/3.3/3.3% respectively, over FY21-FY23E. Lower earnings growth is due to lower revenue growth, rise in S,G&A expenses, though interest cost will be reducing. The company reduced net debt substantially through divestment of animal health business to less than Rs10bn in Jul’21. The launch of covid-19 vaccine is expected shortly and successful approval could provide upside in near term.

* Valuations and risks: We largely maintain our estimates. We believe potential of the base business remains weak with only 3.3% EPS CAGR and potential upside from vaccines already factored in the price. Considering recent correction in stock, we upgrade the stock to REDUCE from Sell with a target of Rs505/share (earlier Rs512) based on 22xFY23E EPS and an NPV of Rs26/share for covid-19 vaccines. Key upside risks: prolonged use of COVID-19 vaccine with higher quantities and early resolution of Moraiya facility.

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