remain tepid; Valuation reflects near term potential May 29, 2017 Surajit Pal surajitpal@plindia.com +912266322259 Rating Accumulate Price Rs444 Target Price Rs460 Implied Upside 3.6% Sensex 31,028 Nifty 9,595 (Prices as on May 26, 2017) Trading data Market Cap. (Rs bn) 765.3 Shares o/s (m) 1,725.0 3M Avg. Daily value 476.7 Major shareholders Promoters 74.79% Foreign 9.96% Domestic Inst. 7.11% Public & Other 8.03% Stock Performance (%) 1M 6M 12M Absolute (2.1) 9.5 38.5 Relative (5.1) (8.4) 20.8 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 18.1 12.6 44.1 2019 23.0 17.6 30.9 Price Performance (RIC: CADI.BO, BB: CDH IN) (Rs) 500 300 100 0 May16 Jul16 Source: Bloomberg Sep16 Nov16 Jan17 Mar17 May17 Cadila s overall performance were in line with our estimates which was more tepid while we remain optimistic in future performance as its Moraiya facility is to receive approvals post resolution in the near term. Its sales increased by 6% while adj. EBITDA and adj. PAT declined by 16% and 32% YoY respectively. While Domestic business (47% of turnover) grew 10%, Cadila s exports (53% of turnover) increased only 3%. US generics continue to be impacted from the lack of approvals despite successful completion of USFDA visit of the Moraiya plant. Management expect official resolution acceptance letter and clearance of new approvals which will be realisable from Q2FY18E. Gross margin increased by 240bps indicating of increased production in Moraiya plant helping to compete with strong price erosion in key drugs in US such as Bupropion XL and Tamsulosin. While SGA and R&D expenses were controlled with only 10% growth and flat QoQ respectively, Cadila s operational improvement is reflected in sequential EBITDA growth of 15% QoQ to Rs4.6bn and 150bps improvement in margin to 16.4% QoQ. Cadila guided of more than 2025 ANDA approvals in FY18E in US including key products with limited competition which seems achievable post resolution of Moraiya facility. India formulation is to achieve 10% growth despite GST issues due to the lower base in FY17. We revising upwards our estimates for sales, EBITDA and PAT by 9%, 26% and 35% in FY17E and 16%, 36% and 51% in FY18E respectively to reflect the benefits of resolution in Moraiya facility. We upgrade our recommendation to Accumulate from under review and set new TP at Rs460 up from Rs337. Our TP is at 20x of FY19E earnings. Contd 2 Key financials (Y/e March) 2016 2017 2018E 2019E Revenues 96,658 88,799 105,711 120,553 Growth (%) 13.8 (8.1) 19.0 14.0 EBITDA 23,793 11,582 23,309 28,390 PAT 23,378 9,520 18,523 23,569 EPS (Rs) 22.8 9.3 18.1 23.0 Growth (%) 103.2 (59.3) 94.6 27.2 Net DPS (Rs) 1.5 1.5 1.5 1.5 Profitability & Valuation 2016 2017 2018E 2019E EBITDA margin (%) 24.6 13.0 22.1 23.6 RoE (%) 47.0 15.0 24.4 25.4 RoCE (%) 37.5 11.7 18.3 20.3 EV / sales (x) 4.7 5.2 4.4 3.8 EV / EBITDA (x) 19.3 40.2 19.9 16.0 PE (x) 19.4 47.7 24.5 19.3 P / BV (x) 8.0 6.5 5.5 4.4 Net dividend yield (%) 0.3 0.3 0.3 0.3 Source: Company Data; PL Research Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
US sales improved by 21% QoQ: With the benefit from the launch of AG of Asacol HD and higher utilisation of Moraiya facility, the US sales increased by 21% QoQ to US$152m in despite higher competitive intensity. we expect approvals in gprevacid ODT and gtoprol to drive near term growth followed by approval in Lialda as Cadila being the only generic till FY20E. Guided India sales growth at 1314%: While its India formulation growth remain rangebound at 810% over last eight quarters, management guided for improved growth of 1314% in FY18E on the back benefits of lower base in FY17 and additional sales from the acquired brands from MSD and Astrazeneca in India. Other verticals remain promising: Cadila s other business verticals shown improved performance especially JV for vaccines as it will inlicense vaccines (for new epidemics) from global partners for selling in india. Key takeaway from conference call Management completed remediation process in Moraya plant and addressed two concerns of USFDA mentioned in the Warning Letter. Management clarified that they expect Warning letter to be lifted in next 6 months (H1FY18E). With favourable rulings from US District and Federal (Appeal) Court on Lialda, Cadila expects to approval and launch the drug from Moraiya facility in FY18E Latam sales increased by 9% YoY to Rs603m in on the back of strong growth in Brazil post new approvals. Cadila s LatAm sales were mainly contributed by Brazil followed by Mexico. R&D costs are guided to be in the range of 78% in FY18E despite requirements of many clinical trials of NCE molecules and biosim products in regulated markets, and key transdermal patches (gexelon) in US. Two products were acquired from Teva including a Transdermal product in US in FY17. Cadila guided for less than 20% effective tax rate in FY18E due to tax benefits from newly commissioned facility. Capex incurred in FY17E was Rs9bn (including acquisition of US based specialty pharmaceuitical company, Sentynl Therapeutics Inc) and management guided for higher capex of Rs10bn in FY18E due to expected approvals from Moraiya (30 approvals) and Baddi plant (10 approvals) which would require additional capex. Of these, management believes 6 products to be key approvals which could contribute US$3040m each. Management guided for 23 ANDA approvals in transdermal therapeutic area in FY18E Management expects one quarter GST impact in FY18E due to destocking by channel partners. The company guided to achieve 1314% growth in domestic formulations in FY18E Management expects US base business erosion in high single digits (810%) in FY18E May 29, 2017 2
Exhibit 1: Change in Estimates Old New Difference FY18E FY19E FY18E FY19E FY18E FY19E Sales 97,241 104,139 105,711 120,553 9% 16% EBITDA 18,524 20,828 23,309 28,390 26% 36% EBITDA margin 19.0% 20.0% 22.1% 23.6% PAT (Rs) 13,762 15,634 18,523 23,569 35% 51% Source: PL Research Exhibit 2: Result Overview Y/e March Q4FY16 YoY gr. (%) FY17 FY16 YoY gr. (%) Net Sales 25,249 23,871 5.8 23,638 96,253 98,376 (2.2) Raw Material 9,284 7,782 19.3 8,994 34,451 30,959 11.3 % of Net Sales 36.8 32.6 38.0 35.8 31.5 Personnel Cost 4,005 3,477 15.2 3,710 15,002 12,616 18.9 % of Net Sales 15.9 14.6 15.7 15.6 12.8 Others 7,324 7,110 3.0 6,891 27,764 29,290 (5.2) % of Net Sales 29.0 29.8 29.2 28.8 29.8 Total Expenditure 20,613 18,369 12.2 19,595 77,217 72,865 6.0 EBITDA 4,636 5,502 (15.7) 4,043 19,036 25,511 (25.4) Margin (%) 18.4 23.0 17.1 19.8 25.9 Depreciation 1,145 764 49.9 898 3,750 2,921 28.4 EBIT 3,491 4,738 (26.3) 3,145 15,286 22,590 (32.3) Other Income 731 393 86.0 166 1,286 1,025 25.5 Interest 99 158 (37.3) 66 450 528 (14.8) PBT 4,123 4,973 (17.1) 3,245 16,122 23,087 (30.2) ExtraOrd. Inc./Exps. 249 (82) (403.7) (75) (44) (101) (56.4) Total Taxes 19 (627) (103.0) 81 1,289 1,774 (27.3) ETR (%) 0.5 (12.6) 2.5 8.0 7.7 Reported PAT 3,855 5,682 (32.2) 3,239 14,877 21,414 (30.5) May 29, 2017 3
Exhibit 3: Major Sources of Revenues Y/e March Q4FY16 YoY gr. (%) FY17 FY16 YoY gr. (%) Domestic 11,610 10,539 10.2 11,268 45,359 40,940 10.8 % of Net Sales 47.1% 45.4% 48.9% 48.2% 44.2% Formulation 8,402 7,716 8.9 7,968 32,441 29,852 8.7 % of Net Sales 34.1% 33.2% 34.6% 34.5% 32.2% API 934 922 1.3 1,053 3,795 3,647 4.1 % of Net Sales 3.8% 4.0% 4.6% 4.0% 3.9% Consumer HC & Others 1, 1,057 13.5 1,113 4,593 4,242 8.3 % of Net Sales 4.9% 4.6% 4.8% 4.9% 4.6% Animal Healthcare 1,074 844 27.3 1,134 4,530 3,199 41.6 % of Net Sales 4.4% 3.6% 4.9% 4.8% 3.5% Exports 13,032 12,688 2.7 11,755 48,797 51,678 (5.6) % of Net Sales 52.9% 54.6% 51.1% 51.8% 55.8% Formulation 12,518 12,201 2.6 11,320 47,206 50,031 (5.6) % of Net Sales 50.8% 52.5% 49.2% 50.1% 54.0% North America 9,851 9,610 2.5 8,869 37,090 40,215 (7.8) EU 620 705 (12.1) 653 2,623 2,950 (11.1) LatAM 603 553 9.0 659 2,445 2,177 12.3 Emerging markets 1,444 1,333 8.3 1,139 5,048 4,689 7.7 Income from JVs 514 487 5.5 435 1,591 1,647 (3.4) % of Net Sales 2.1% 2.1% 1.9% 1.7% 1.8% Total 24,642 23,227 6.1 23,023 94,156 92,618 1.7 Exhibit 1: India Formulations just crossed threshold of double digit growth in Q2FY16 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Q1FY17 May 29, 2017 4
Exhibit 2: US Generics: benefits of additional HCQS sales set to be neutralised in Q3FY16E 12,000 10,000 8,000 6,000 4,000 2,000 Exhibit 3: Consumer Healthcare: Growth remains listless 1, 1, Exhibit 4: EU Sales: Going down further with lack of direction 1, 1, May 29, 2017 5
Exhibit 5: LatAm Sales: Depreciated currencies takes toll on reported growth 900 700 500 300 100 Exhibit 6: Emerging Markets: Manages to grow despite falling currency 1, 1, 1, Exhibit 7: Income from JV: Additions of new products, clients drive growth 1, 1, May 29, 2017 6
Exhibit 8: Sales & Sales Growth Sales YoY gr. (%) (RHS) 30,000 25,000 20,000 15,000 10,000 5,000 35.0 30.0 25.0 20.0 15.0 10.0 5.0 (5.0) Exhibit 9: Other Operating Revenues: IPR sales of ANDA drives last two qtr sales 1, 1, Exhibit 10: EBITDA & EBITDA Margin EBITDA Margin (%) (RHS) 7,000 6,000 5,000 4,000 3,000 2,000 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% May 29, 2017 7
Exhibit 11: PAT & PAT Margins PAT Margin (%) (RHS) 6,000 5,000 4,000 3,000 2,000 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% May 29, 2017 8
Income Statement Y/e March 2016 2017 2018E 2019E Net Revenue 96,658 88,799 105,711 120,553 Raw Material Expenses 30,959 34,451 32,770 35,563 Gross Profit 65,699 54,348 72,940 84,990 Employee Cost 12,616 15,002 17,654 20,132 Other Expenses 29,290 27,764 31,978 36,467 EBITDA 23,793 11,582 23,309 28,390 Depr. & Amortization 2,921 3,750 3,986 4,414 Net Interest 528 450 389 320 Other Income 4,707 3,383 3,594 4,340 Profit before Tax 25,051 10,765 22,529 27,996 Total Tax 1,774 1,289 4,055 4,479 Profit after Tax 23,277 9,476 18,474 23,517 ExOd items / Min. Int. (151) (50) (49) (52) Adj. PAT 23,378 9,520 18,523 23,569 Avg. Shares O/S (m) 1,024.0 1,024.0 1,024.0 1,024.0 EPS (Rs.) 22.8 9.3 18.1 23.0 Cash Flow Abstract Y/e March 2016 2017 2018E 2019E C/F from Operations 19,938 (38,447) (5,965) (433) C/F from Investing (9,039) 31,455 10,022 10,022 C/F from Financing (9,527) 13,152 (4,841) (4,255) Inc. / Dec. in Cash 1,372 6,159 (784) 5,334 Opening Cash 7,904 9,276 15,435 14,651 Closing Cash 9,276 15,435 14,651 19,984 FCFF 21,110 (1,975) 8,543 9,844 FCFE 18,818 14,312 5,495 7,205 Key Financial Metrics Y/e March 2016 2017 2018E 2019E Growth Revenue (%) 13.8 (8.1) 19.0 14.0 EBITDA (%) 48.6 (51.3) 101.2 21.8 PAT (%) 103.2 (59.3) 94.6 27.2 EPS (%) 103.2 (59.3) 94.6 27.2 Profitability EBITDA Margin (%) 24.6 13.0 22.1 23.6 PAT Margin (%) 24.2 10.7 17.5 19.6 RoCE (%) 37.5 11.7 18.3 20.3 RoE (%) 47.0 15.0 24.4 25.4 Balance Sheet Net Debt : Equity 0.1 0.2 0.1 Net Wrkng Cap. (days) (73) (155) (159) (105) Valuation PER (x) 19.4 47.7 24.5 19.3 P / B (x) 8.0 6.5 5.5 4.4 EV / EBITDA (x) 19.3 40.2 19.9 16.0 EV / Sales (x) 4.7 5.2 4.4 3.8 Earnings Quality Eff. Tax Rate 7.1 12.0 18.0 16.0 Other Inc / PBT 18.8 31.4 16.0 15.5 Eff. Depr. Rate (%) 5.0 4.6 4.3 4.3 FCFE / PAT 80.5 150.3 29.7 30.6. Balance Sheet Abstract Y/e March 2016 2017 2018E 2019E Shareholder's Funds 56,992 69, 81,941 103,654 Total Debt 10,537 26,824 23,776 21,137 Other Liabilities (1,818) (2,445) (2,044) (1,536) Total Liabilities 65,711 93,979 103,673 123,255 Net Fixed Assets 46,987 72,984 78,998 84,585 Goodwill Investments 4,162 4,348 4,348 4,348 Net Current Assets 6,203 6,674 9,855 23,327 Cash & Equivalents 6,387 15,435 14,651 19,984 Other Current Assets 34,426 44,297 51,429 59,268 Current Liabilities 34,610 53,058 56,224 55,925 Other Assets 8,359 9,973 10,472 10,995 Total Assets 65,711 93,979 103,673 123,255 Quarterly Financials Y/e March Q1FY17 Net Revenue 22,871 23,531 23,638 25,249 EBITDA 5,239 5,160 4,043 4,636 % of revenue 22.9 21.9 17.1 18.4 Depr. & Amortization 843 864 898 1,145 Net Interest 140 187 66 99 Other Income 153 236 166 731 Profit before Tax 4,409 4,345 3,245 4,123 Total Tax 966 1,068 81 19 Profit after Tax 3,371 3,172 3,240 3,855 Adj. PAT 3,551 3,362 3,239 3,855 Key Operating Metrics Y/e March 2016 2017 2018E 2019E US Formulations 40,215 36,603 46,437 55,724 Domestic Formulations 29,732 32,650 35,915 39,866 Consumer Healthcare 4,570 4,643 4,762 4,885 Income from JVs 5,342 1, 1,680 1,764. May 29, 2017 9
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature 50% 46.7% BUY : Over 15% Outperformance to Sensex over 12months % of Total Coverage 40% 30% 20% 10% 0% 34.2% 19.2% 0.0% BUY Accumulate Reduce Sell Accumulate : Outperformance to Sensex over 12months Reduce : Underperformance to Sensex over 12months Sell : Over 15% underperformance to Sensex over 12months Trading Buy : Over 10% absolute upside in 1month Trading Sell : Over 10% absolute decline in 1month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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