3QFY15 Result Update Institutional Equities Cadila Healthcare 11 February 2015 Reuters: CADI.BO; Bloomberg: CDH IN Stable Performance Cadila Healthcare s (CHL) 3QFY15 earnings were in line with our expectations because of strong growth in the US business (QoQ growth of ~US$12mn), which offset the weakness in other businesses. We continue to remain sanguine on the US business growth, given the elevated drug filings/approvals. All this coupled with a likely recovery in domestic business from FY16 onwards will enable CHL to break the jinx of flat/falling earnings growth witnessed over the past four years and post strong growth over FY14- FY17E (we expect a 24% earnings CAGR). Sharp growth in US business offsets weakness in other geographies: CHL s US business increased by ~US$12mn QoQ led by price hikes in Hydrochloroquine (HCQS) and traction in products such as the authorised generic (AG) of Niacin and Divalproex Sodium tablets. CHL launched one product in the US in 3QFY15. Growth in emerging markets of 22%/15% was led by better performance in South Africa (branded generic business). India business was up 9% YoY (eight new drug launches in 3QFY15, nine in 2QFY15), and if we exclude Boehringer Ingelheim s discontinued portfolio from the base, revenue was up 10% and is likely to grow in double digits from FY16 onwards. In line with higher US revenue and a better product mix, gross margin improved 380bps/430bps YoY/QoQ, respectively, which was partially offset by higher staff costs, up 21%/10% YoY/QoQ, respectively, on account of the change in actuarial assumption which led to higher actuarial provisioning. Research and development or R&D costs increased to 8.6% of sales from 5.6% in 2QFY15 and 6.6% in 3QFY14 (for 9MFY14, it stood at 6.5% which was in the range specified by the management of 6%-7% for FY15), consequent to which overall operating margin stood at 20.4%, above our/bloomberg consensus estimates of 20%/20.1% by 40bps/30bps, respectively. Depreciation was up 43% YoY following the change in calculating the useful life of assets, as per the revised Companies Act. Reported PAT of Rs2.8bn was 2% below our/bloomberg consensus estimates, respectively, on account of lower other income and a higher tax rate of 21.1% compared to 16.6% in 2QFY15 and 17% in 3QFY14. US business is key driver of our bullish view: We believe CHL is set to witness a strong growth on likely pick-up in product approvals in the US, (approvals pending for around 155 products) and a sharp uptick in the filing rate (54 filings in CY13/32 filings in 9MFY15; run-rate of 30-40 filings per year and 10-15 approvals likely). We expect CHL to comfortably maintain a 20-product launch run-rate in the US in FY16 and beyond, including launches in controlled substance/transdermal/nasal segments and limited competition products like Sirolimus (US$200mn product) and Prevacid OD (CHL has received a complete response letter from the US Food and Drug Administration or USFDA). UNDER REVIEW Sector: Pharmaceuticals CMP: Rs1,514 Sumit Singhania sumit.s@nirmalbang.com +91-22-3926 8111 Key Data Current Shares O/S (mn) 204.7 Mkt Cap (Rsbn/US$bn) 309.9/5.0 52 Wk H / L (Rs) 1,760/872 Daily Vol. (3M NSE Avg.) 137,840 Price Performance (%) 1 M 6 M 1 Yr Cadila Heathcare (10.3) 37.7 63.5 Nifty Index 3.4 13.2 41.5 Source: Bloomberg Y/E March (Rsmn) 3QFY14 2QFY15 3QFY15 YoY (%) QoQ (%) 9MFY14 9MFY15 YoY (%) Net revenue 18,717 21,080 21,895 17.0 3.9 52,555 63,476 20.8 Total raw material costs 7,204 8,221 7,591 5.4 (7.7) 19,360 23,945 23.7 % of revenue 38.5 39.0 34.7 - - 36.8 37.7 - Staff costs 2,615 2,873 3,170 21.3 10.4 7,973 8,944 12.2 % of revenue 14.0 13.6 14.5 - - 15.2 14.1 - R&D expenses 1,234 1,179 1,883 52.6 59.7 3,575 4,119 15.2 % of revenue 6.6 5.6 8.6 - - 6.8 6.5 - Other expenses 4,712 4,598 4,778 1.4 3.9 13,232 14,024 6.0 % of revenue 25.2 21.8 21.8 - - 25.2 22.1 - EBITDA 2,953 4,210 4,472 51.5 6.2 8,416 12,443 47.9 EBITDA margin (%) 15.8 20.0 20.4 - - 16.0 19.6 - Other income 128 146 100 (21.7) (31.5) 375 350 (6.7) Interest costs 190 173 162 (14.4) (5.9) 662 516 (22.0) Depreciation 496 733 707 42.7 (3.5) 1,479 2,117 43.2 Exceptional item (35) 2 46 - - (35) 37 - PBT after exceptional item 2,395 3,453 3,749 56.5 8.6 6,616 10,197 54.1 Tax 408 571 791 93.7 38.5 713 1,887 164.8 Minority interest (92) (101) (139) - - (254) (308) - Reported net profit 1,894 2,781 2,819 48.8 1.4 5,650 8,002 41.6 Please refer to the disclaimer towards the end of the document.
Conference-call highlights: 1) CHL expects its joint venture business to remain at the current level. 2) CHL has given tax rate guidance of 17%-18% for FY15/FY16. 3) Capex guidance stands at Rs5bn for FY16. 4) Net debt stood at Rs20bn and cash balance at Rs6bn. 5) In 3QFY15, CHL launched seven new products in emerging markets. 6) CHL expects to receive transdermal product approvals in FY16. 7) CHL expects to receive nasal/topical product approvals in FY16/FY17. 8) For the minor 483s received in respect of Moraiya unit a couple of months ago from the USFDA, the company has filed its reply. 9) For FY16, CHL is looking at Rs100bn revenue and a 21% margin. Exhibit 1: Financial summary Revenue 63,577 72,240 80,454 94,797 109,640 YoY (%) 20.8 13.6 11.4 17.8 15.7 EBITDA 11,251 12,001 15,335 19,362 23,035 EBITDA (%) 17.7 16.6 19.1 20.4 21.0 Reported PAT 6,535 8,036 10,471 13,623 16,495 Adj. PAT 6,535 8,189 10,471 13,623 16,495 YoY (%) 0.1 25.3 27.9 30.1 21.1 Fully DEPS 31.9 40.0 51.1 66.5 80.6 RoE (%) 23.6 25.7 27.2 28.4 27.6 RoCE (%) 16.8 16.0 19.5 22.1 23.0 P/E (x) 47.4 38.6 29.6 22.7 18.8 EV/EBITDA (x) 29.6 27.6 21.6 16.9 13.9 Exhibit 2: Revenue break-up (Rsmn) 3QFY14 2QFY15 3QFY15 YoY (%) QoQ (%) 9MFY14 9MFY15 YoY (%) Domestic 7,651 8,835 8,463 10.6 (4.2) 23,744 26,006 9.5 Formulations 5,883 6,808 6,418 9.1 (5.7) 18,398 19,975 8.6 APIs 112 257 225 100.9 (12.5) 431 722 67.5 Wellness 1,034 1,101 1,140 10.3 3.5 3,223 3,316 2.9 Animal health & others 622 669 680 9.3 1.6 1,692 1,993 17.8 Exports 10,061 11,093 12,299 22.2 10.9 25,427 34,062 34.0 Formulations 9,167 10,331 11,429 24.7 10.6 22,873 31,531 37.9 US 6,316 8,020 8,959 41.8 11.7 14,976 24,144 61.2 Europe 1,186 777 847 (28.6) 9.0 3,055 2,636 (13.7) Japan 145 2 - (100.0) (100.0) 398 2 (99.5) Brazil 688 647 610 (11.3) (5.7) 1,861 1,801 (3.2) Emerging markets 832 885 1,013 21.8 14.5 2,583 2,948 14.1 APIs & others 894 762 870 (2.7) 14.2 2,554 2,531 (0.9) JVs 1,012 1,136 1,217 20.3 7.1 3,390 3,542 4.5 Total 18,724 21,064 21,979 17.4 4.3 52,561 63,610 21.0 Exhibit 3: Actual performance versus our estimates, Bloomberg consensus estimates (Rsmn) Actual Our estimate Variation (%) Bloomberg cons. est. Variation (%) Revenue 21,895 22,183 (1.3) 21,701 0.9 EBITDA 4,472 4,430 1.0 4,371 2.3 EBITDA margin (%) 20.4 20.0 40bps 20.1 30bs Reported PAT 2,819 2,880 (2.1) 2,862 (1.5) 2 Cadila Healthcare
Exhibit 4: P/E ratio (x) 35 30 25 20 15 10 5 0 9-Feb-10 9-Feb-11 9-Feb-12 9-Feb-13 9-Feb-14 9-Feb-15 3 Cadila Healthcare
Financials Exhibit 5: Income statement Net sales (incl. other oper. income) 63,577 72,240 80,454 94,797 1,09,640 % growth 20.8 13.6 11.4 17.8 15.7 Raw material costs (23,202) (27,136) (27,067) (30,599) (34,749) Staff costs (9,042) (10,711) (11,376) (13,404) (15,503) Research & development exp. (4,705) (4,608) (5,884) (6,933) (8,019) Other expenses (15,377) (17,784) (20,791) (24,498) (28,334) Total expenditure (52,326) (60,239) (65,119) (75,435) (86,605) EBITDA 11,251 12,001 15,335 19,362 23,035 % growth 3.8 6.7 27.8 26.3 19.0 EBITDA margin (%) 17.7 16.6 19.1 20.4 21.0 Other income 370 507 639 753 870 Interest costs (1,687) (902) (780) (750) (720) Gross profit 9,934 11,606 15,194 19,365 23,185 % growth 4.3 16.8 30.9 27.4 19.7 Depreciation (1,847) (2,012) (2,158) (2,404) (2,650) Profit before tax 8,087 9,594 13,036 16,960 20,535 % growth 1.8 18.6 35.9 30.1 21.1 Exceptional items - (172) - - - Tax (1,188) (1,060) (1,955) (2,544) (3,080) Effective tax rate (%) 14.7 11.0 15.0 15.0 15.0 Minority interest (364) (326) (609) (793) (960) Net profit 6,535 8,036 10,471 13,623 16,495 % growth 0.1 23.0 30.3 30.1 21.1 Adj. profit 6,535 8,189 10,471 13,623 16,495 % growth 0.1 25.3 27.9 30.1 21.1 Exhibit 7: Balance sheet Equity 1,024 1,024 1,024 1,024 1,024 Reserves 28,421 33,366 41,560 52,221 65,129 Net worth 29,445 34,390 42,584 53,245 66,153 Long-term loans 29,178 27,004 26,004 25,004 24,004 Total loans 29,178 27,004 26,004 25,004 24,004 Deferred tax liability 1,005 961 961 961 961 Minority interest 1,193 1,444 2,051 2,842 3,799 Total liabilities 60,821 63,799 71,600 82,052 94,917 Gross block 43,762 46,640 52,640 58,640 64,640 Depreciation 13,506 15,402 17,560 19,964 22,615 Net block 30,256 31,238 35,080 38,676 42,025 Capital work-in-progress 7,356 8,915 7,915 6,915 5,915 Long-term Investments 1,145 866 866 866 866 Inventories 12,136 13,675 16,121 19,249 22,263 Debtors 9,551 11,337 12,174 14,345 16,591 Cash 5,838 5,488 5,307 8,331 14,048 Other current assets 7,440 8,347 9,318 10,856 12,449 Total current assets 34,965 38,847 42,920 52,781 65,350 Creditors 6,568 9,108 8,174 9,469 10,871 Other current liabilities 6,333 6,959 7,006 7,717 8,368 Total current liabilities 12,901 16,067 15,180 17,185 19,239 Net current assets 22,064 22,780 27,740 35,595 46,111 Total assets 60,821 63,799 71,600 82,052 94,917 Exhibit 6: Cash flow EBIT 9,404 9,989 13,177 16,958 20,385 (Inc.)/dec. in working capital (3,591) (1,703) (5,671) (5,517) (5,423) Cash flow from operations 5,813 8,286 7,506 11,441 14,961 Other income 370 507 639 753 870 Depreciation 1,847 2,012 2,158 2,404 2,650 Interest paid (-) (1,687) (902) (780) (750) (720) Tax paid (-) (1,188) (1,060) (1,955) (2,544) (3,080) Dividends paid (-) (2,066) (1,875) (1,749) (2,279) (2,964) Net cash from operations 3,089 6,968 5,819 9,025 11,717 Capital expenditure (-) (5,958) (4,437) (5,000) (5,000) (5,000) Net cash after capex (2,869) 2,531 819 4,025 6,717 Inc./(dec.) in long-term borrowing 6,285 (2,174) (1,000) (1,000) (1,000) Inc./(dec.) in borrowings 6,285 (2,174) (1,000) (1,000) (1,000) (Inc.)/dec. in investments (903) 279 - - - Cash from financial activities 5,382 (1,895) (1,000) (1,000) (1,000) Others (1,341) (986) - - - Opening cash 4,666 5,838 5,488 5,307 8,331 Closing cash 5,838 5,488 5,307 8,331 14,048 Change in cash 1,172 (350) (181) 3,024 5,716 Exhibit 8: Key ratios Y/E March FY13 FY14 FY15E FY16E FY17E Per share (Rs) Reported EPS 31.9 39.2 51.1 66.5 80.6 Adjusted EPS 31.9 40.0 51.1 66.5 80.6 DPS 7.5 7.1 9.2 12.0 14.5 BV/share 143.8 168.0 208.0 260.1 323.1 Dividend payout (%) 32.2 21.7 21.7 21.7 21.7 Performance ratios (%) RoE 23.6 25.7 27.2 28.4 27.6 RoCE 16.8 16.0 19.5 22.1 23.0 Valuation ratios (x) P/E 47.4 38.6 29.6 22.7 18.8 P/BV 10.5 9.0 7.3 5.8 4.7 EV/net sales 5.2 4.6 4.1 3.4 2.9 EV/EBITDA 29.6 27.6 21.6 16.9 13.9 Efficiency ratios Asset turnover (x) 1.1 1.1 1.2 1.2 1.2 Working capital/sales (x) 0.4 0.4 0.4 0.4 0.5 Receivable days 56.6 58.6 56.6 56.6 56.6 Inventory days 72.0 70.7 75.0 76.0 76.0 Payable days 50.3 59.8 50.4 50.5 50.5 4 Cadila Healthcare
Rating track Date Rating Market price (Rs) Target price (Rs) 1 November 2011 Sell 758 743 11 November 2011 Sell 760 737 22 December 2011 Hold 701 737 12 January 2012 Hold 678 737 8 February 2012 Sell 660 629 19 March 2012 Sell 712 674 16 April 2012 Sell 702 674 11 May 2012 Hold 759 831 9 July 2012 Hold 774 831 7 August 2012 Hold 909 923 4 October 2012 Hold 858 923 8 November 2012 Hold 859 910 7 January 2013 Hold 885 910 11 February 2013 Sell 790 742 9 April 2013 Sell 752 742 31 May 2013 Buy 775 940 9 July 2013 Buy 791 940 8 August 2013 Hold 708 792 7 October 2013 Hold 689 792 1 November 2013 Hold 663 728 30 December 2013 Buy 785 908 7 January 2014 Buy 785 908 10 February 2014 Buy 903 1,120 11 April 2014 UR 993 1,120 19 May 2014 Buy 912 1,120 10 July 2014 Accumulate 1,143 1,120 31 July 2014 Accumulate 1,165 1,195 7 November 2014 Accumulate 1,411 1,471 5 Cadila Healthcare
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL is in the process of making an application with SEBI for registering as a Research Entity in terms of SEBI (Research Analyst) Regulations, 2014. NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access our reports on Bloomberg Type NBIE <GO> Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 3926 8017 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 8230, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 8100/8101, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 8102/8103, +91 22 6636 8830 Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com +91-22-39268226 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-400013. Board No. : 91 22 3926 8000/1; Fax. : 022 3926 8010 6 Cadila Healthcare