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Margin supported by lower R&D

Cadila Healthcare (Cadila) reported Q4FY21 performance largely in line with our estimates. However, US sales were weak while EBITDA margin was supported by reduced expenditure towards R&D. Total revenue grew 3.2% to Rs38.5bn (I-Sec: Rs37.8bn) supported by India formulations and consumer businesses. EBITDA margin (ex-forex) improved 170bps to 22.2% (I-Sec: 22.0%) driven by lower R&D spend (-19.0% YoY). Adjusted PAT declined 2.8% to Rs4.1bn (I-Sec: Rs4.5bn) due to negative other income. The company has strengthened the balance sheet by substantial net debt reduction to ~Rs35bn, aided by internal accruals and equity raise of Rs10bn in Zydus Wellness (subsidiary). 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. Maintain Sell.

India business strong, US weak: 

India formulations business grew 14.7% YoY with recovery in industry growth from COVID-19 impact and low base of Q4FY20. Consumer wellness business in India also grew strong 22.1% YoY. US revenue dropped 4.6% QoQ to US$204mn due to weak flu season and pressure seen in some key products including Asacol HD. 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 19.9% YoY. EMs grew 45.5% on a low base.

Margins supported by lower R&D:

Cadila witnessed 170bps EBITDA margin (exforex) improvement on YoY basis to 22.2% (+80bps QoQ). However, gross margin dropped 80bps YoY (-120bps QoQ) despite strong growth in US. R&D expenditure declined 19.0% YoY (-34.1% QoQ) and stood at 6.1% of sales vs 7.8% YoY (9.3% QoQ). 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 5.1/3.8/4.1% respectively, over FY21-FY23E. Lower earnings growth is due to rise in S,G&A expenses, though interest cost should be reducing. The company reduced net debt by ~Rs32bn in FY21 to ~Rs35bn which would reduce further after completing the divestment of animal health business. The COVID-19 vaccine data points are expected in coming weeks and successful approval could provide upside in near term.

Valuations and risks:

We marginally revise our estimates to factor in divestment of animal health business. We believe potential of the base business remains weak with only 4.1% EPS CAGR and potential upside from vaccines already factored in the price. Maintain SELL with a revised target of Rs512/share based on 22xFY23E EPS and an NPV of Rs26/share for COVID-19 vaccines (earlier: Rs490/share). Key upside risks: prolonged use of COVID-19 vaccine with higher quantities and early resolution of Moraiya facility.

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