Overall performance disappoints, headwinds continue October 26, 2016 Surajit Pal surajitpal@plindia.com +912266322259 Rating Reduce Price Rs388 Target Price Rs337 Implied Upside 13.1% Sensex 27,837 Nifty 8,615 (Prices as on October 26, 2016) Trading data Market Cap. (Rs bn) 669.4 Shares o/s (m) 1,725.0 3M Avg. Daily value 345.6 Major shareholders Promoters 74.79% Foreign 7.03% Domestic Inst. 7.20% Public & Other 10.86% Stock Performance (%) 1M 6M 12M Absolute (1.3) 18.0 (9.1) Relative 0.3 11.0 (10.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 15.9 15.9 0.1 2018 23.7 19.3 22.5 Price Performance (RIC: CADI.BO, BB: CDH IN) (Rs) 500 300 100 0 Oct15 Dec15 Source: Bloomberg Feb16 Apr16 Jun16 Aug16 Oct16 Sales, EBITDA, PAT below estimates: Cadila s sales of Rs23.4bn, grew by 3% YoY and 10% below our estimates due to lower sales in key geographies and key verticals. Sequentially, adj. gross margin decreased by 120bps to 63.9% due to value erosion in core US portfolio, while core EBITDA margin increased by 100bps to 21.4% (Vs. PLe of 25%) mainly due to lower R&D costs in. The company however have been showing steady improvement in managing SGA costs since Q4FY16 with special internal program to increase operational cost efficiency. Cadila s R&D expenses of Rs1.5bn were 6.5% of sales in vs 7.3% in Q1FY17, though guidance is for 78% of sales in FY17E due to new projects in Biosim portfolio for regulated markets, vaccines and niche generics in US. Its US sales were US$148m vs our estimates of US$160m and the shortfall was mainly due to pricing pressure on older generics and loss of market share to new competition in HCQS. Management maintains guidance of 1215 new approvals from Baddi and SEZ plant in FY17E including three meaningful approvals with revenue opportunities of US$2530m each. US sales below estiamtes on erosion in core generics: While the launch of AG of Asacol HD added 60 days of sales, the strong value erosion of older generics in its portfolio has restricted US sales to US$148m vs our estiamtes of US$160m in. A large part of erosion was contributed by strong competition in HCQS. Management completed site transfer of key drugs gprevacid ODT and gtoprol to SEZ plant and expect approval in 68 months. With high complexity of BA/BE study in Asacol HD and Lialda, Cadila assumes high risk strategy of maintaining ANDA of the two drugs from Moraya and expect resolution of the plant in near term to pave the path for approvals in FY18E. Cadila s changed plan for site transfer of some of the key drugs is due to high complexity of bioequivalence study Valuation Maintain Reduce, retain TP at Rs337: Though Cadila received EIR on Form483 on Moraiya plant in Q1FY17, the visibility remains weak on achiving resolution on Warning Letter. India formulaiton growth remain a pipe dream despite strong monsoon and strong traction in acute therapy drugs. The stock trades at PER of 24.4x and 22.2x FY17E and FY18E despite 8% CAGR in earnings during FY1618E, respectively. Due to continued challenges in visibility, the existing conditions have deteriorated. We maintian Reduce and retain TP at Rs337. Key financials (Y/e March) 2015 2016 2017E 2018E Revenues 84,971 96,658 105,457 113,257 Growth (%) 20.4 13.8 9.1 7.4 EBITDA 16,015 22,111 22,251 25,709 PAT 11,506 17,190 16,260 24,267 EPS (Rs) 11.2 16.8 15.9 23.7 Growth (%) 43.1 49.4 (5.4) 49.2 Net DPS (Rs) 2.4 1.5 1.5 1.5 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 18.8 22.9 21.1 22.7 RoE (%) 29.9 35.8 28.0 34.4 RoCE (%) 22.9 29.1 24.5 31.8 EV / sales (x) 4.7 4.1 3.8 3.5 EV / EBITDA (x) 25.2 18.1 17.9 15.2 PE (x) 34.5 23.1 24.4 16.4 P / BV (x) 9.3 7.4 6.4 5.1 Net dividend yield (%) 0.6 0.4 0.4 0.4 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
Key takeaway from post conference call Cadila site transferred 13 existing drugs from Moraya to Baddi and SEZ plant, while it is in the process to transfer and apply for approval of 11 additional products, which are currently pending with USFDA. Management expects 68 months for individual approval of products post application after site transfer. The site transfer of two key drugs, gtoprol and gprevacid ODT, from Moraya to SEZ plant are completed and new applications are to be filed soon and approval is expected in the 68 months. Management completed remediation process in Moraya plant and addressed two concerns of USFDA mentioned in the Warning Letter. As per the management, USFDA accepted the invitation for next plant visit without any clarity on timeline. Management clarified that there were no such large remediation expenditures as it used internal resources to address the concerns of FDA. Cadila launched AG (authorised generic) of Asacol HD from 01 Aug 2016 as there was no visibility of launching its own paraiv by the timeline. Currently, Cadila had settled with patent holders to launch the AG of Asacol HD if they failed to receive approvals from USFDA in six months post patent expiry of the drug (i.e. by July 2016). Asacol HD (US mkt size: US$750m) remain most important drug for Cadila as it has exclusivity of 180 days in US and management believes with no visibility of next paraiv filers, this will increase possibility of sole exclusivity by another 24 months. Latam sales increased by 25% in on the back of strong growth in Brazil post new approvals, as guided by management. It also launched three products in Mexico though its revenue base is small in the country. Management is however cautious in expanding sales in Latam due to uncertainty over currency movement. Cadila s LatAm sales were mainly contributed by Brazil followed by Mexico. Management expects operating breakeven in Mexico in three years. Cadila received five approvals, while launched 2 products in Brazil and Mexico in Q1FY17 R&D costs are guided to be in the range of 78% in FY17E despite requirements of many clinical trials of NCE molecules and biosim products in regulated markets, and key transdermal patches in US. Two products were acquired from Teva including one Transdermal product in US. Management plans to file more than 35 ANDAs in FY17, of which 10 ANDAs were filed in H1FY17. Currently, there are more than 152 ANDA pending with USFDA, of which, more than 40 ANDAs were filed from the new plant in SEZ in the last 42 months. Management expects US approvals in the near term to be expected from Baddi and SEZ plant. For US supplies, Cadila has four plants: Three in India (Baddi, Moraiya, SEZ) and one in US (Nesher Pharma) Cadila guided for 2025% effective tax rate in FY17E due to benefits from newly commissioned facility. October 26, 2016 2
Exhibit 1: Result Overview Y/e March Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Net Sales 23,531 23,508 0.1 22,871 46,402 47,334 (2.0) Raw Material 8,432 7,583 11.2 7,741 16,173 15,570 3.9 % of Net Sales 35.8 32.3 33.8 34.9 32.9 Personnel Cost 3,715 3,133 18.6 3,572 7,287 6,159 18.3 % of Net Sales 15.8 13.3 15.6 15.7 13.0 Others 6,224 6,685 (6.9) 6,319 12,537 13,720 (8.6) % of Net Sales 26.5 28.4 27.6 27.0 29.0 Total Expenditure 18,371 17,401 5.6 17,632 35,997 35,449 1.5 EBITDA 5,160 6,107 (15.5) 5,239 10,405 11,885 (12.5) Margin (%) 21.9 26.0 22.9 22.4 25.1 Depreciation 864 725 19.2 843 1,707 1,416 20.6 EBIT 4,296 5,382 (20.2) 4,396 8,698 10,469 (16.9) Other Income 236 18.0 153 389 440 (11.6) Interest 187 130 43.8 140 327 249 31.3 PBT 4,345 5,452 (20.3) 4,409 8,760 10,660 (17.8) ExtraOrd. Inc./Exps. (99) (76) 30.3 (119) (218) (187) 16.6 Total Taxes 1,068 778 37.3 966 2,034 1,495 36.1 ETR (%) 24.6 14.3 21.9 23.2 14.0 Reported PAT 3,376 4,750 (28.9) 3,562 6,944 9,352 (25.7) Other Comprehensive Income (14) (590) (11) (25) (683) Total Comprehensive Income 3,362 4,160 (19.2) 3,551 6,919 8,669 (20.2) October 26, 2016 3
Exhibit 2: Major Sources of Revenues Y/e March Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Domestic 11,385 10,287 10.7 11,096 22,481 20,469 9.8 % of Net Sales 47.7 44.5 49.0 48.4 44.3 Formulation 8,209 7,543 8.8 7,862 16,071 14,947 7.5 % of Net Sales 34.4 32.6 34.8 34.6 32.3 API 832 898 (7.3) 976 1,808 1,878 (3.7) % of Net Sales 3.5 3.9 4.3 3.9 4.1 Consumer HC & Others 1,119 1,040 7.6 1,161 2,280 2,075 9.9 % of Net Sales 4.7 4.5 5.1 4.9 4.5 Animal Healthcare 1,225 806 52.0 1,097 2,322 1,569 48.0 % of Net Sales 5.1 3.5 4.8 5.0 3.4 Exports 12,483 12,819 (2.6) 11,528 24,011 25,743 (6.7) % of Net Sales 52.3 55.5 51.0 51.6 55.7 Formulation 12,231 12,381 (1.2) 11,138 23,369 24,866 (6.0) % of Net Sales 51.2 53.6 49.2 50.3 53.8 North America 9,888 10,038 (1.5) 8,483 18,371 19,888 (7.6) EU 557 649 (14.2) 792 1,349 1,485 (9.2) LatAM 656 527 24.5 527 1,183 1,080 9.5 Emerging markets 1,130 1,167 (3.2) 1,336 2,466 2,413 2.2 Total Income from JVs 252 438 (42.5) 390 642 877 (26.8) % of Net Sales 1.1 1.9 1.7 1.4 1.9 Total 23,868 23,106 3.3 22,624 46,492 46,212 0.6 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 October 26, 2016 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, October 26, 2016 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, 1, October 26, 2016 6
Exhibit 8: Sales & Sales Growth Sales YoY gr. (%) (RHS) 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% October 26, 2016 7
Exhibit 11: PAT & PAT Margins PAT Margin (%) (RHS) 5,000 4,000 3,000 2,000 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% October 26, 2016 8
Income Statement Y/e March 2015 2016 2017E 2018E Net Revenue 84,971 96,658 105,457 113,257 Raw Material Expenses 31,966 32,770 32,692 33,411 Gross Profit 53,005 63,888 72,766 79,846 Employee Cost 10,965 11,891 14,553 15,629 Other Expenses 26,025 29,886 35,961 38,507 EBITDA 16,015 22,111 22,251 25,709 Depr. & Amortization 2,873 3,022 3,326 3,230 Net Interest 679 486 316 147 Other Income 2,096 4,623 2,109 2,265 Profit before Tax 14,559 23,226 20,719 24,597 Total Tax 2,594 5,711 4,144 Profit after Tax 11,965 17,515 16,575 24,597 ExOd items / Min. Int. 293 275 315 331 Adj. PAT 11,506 17,190 16,260 24,267 Avg. Shares O/S (m) 1,024.0 1,024.0 1,024.0 1,024.0 EPS (Rs.) 11.2 16.8 15.9 23.7 Cash Flow Abstract Y/e March 2015 2016 2017E 2018E C/F from Operations 9,936 19,938 (2,937) 7,130 C/F from Investing (4,647) (9,039) 5,022 2,110 C/F from Financing (3,511) (9,527) (5,266) (5,560) Inc. / Dec. in Cash 1,778 1,372 (3,182) 3,679 Opening Cash 6,126 7,904 9,276 6,094 Closing Cash 7,904 9,276 6,094 9,774 FCFF 10,065 12,938 9,534 12,642 FCFE 7,963 10,717 6,026 8,942 Key Financial Metrics Y/e March 2015 2016 2017E 2018E Growth Revenue (%) 20.4 13.8 9.1 7.4 EBITDA (%) 54.6 38.1 0.6 15.5 PAT (%) 43.2 49.4 (5.4) 49.2 EPS (%) 43.1 49.4 (5.4) 49.2 Profitability EBITDA Margin (%) 18.8 22.9 21.1 22.7 PAT Margin (%) 13.5 17.8 15.4 21.4 RoCE (%) 22.9 29.1 24.5 31.8 RoE (%) 29.9 35.8 28.0 34.4 Balance Sheet Net Debt : Equity 0.1 0.1 (0.1) Net Wrkng Cap. (days) (16) (60) (29) 26 Valuation PER (x) 34.5 23.1 24.4 16.4 P / B (x) 9.3 7.4 6.4 5.1 EV / EBITDA (x) 25.2 18.1 17.9 15.2 EV / Sales (x) 4.7 4.1 3.8 3.5 Earnings Quality Eff. Tax Rate 17.8 24.6 20.0 Other Inc / PBT 14.4 19.9 10.2 9.2 Eff. Depr. Rate (%) 5.6 5.1 5.2 4.7 FCFE / PAT 69.2 62.3 37.1 36.8. Balance Sheet Abstract Y/e March 2015 2016 2017E 2018E Shareholder's Funds 42,516 53,519 62,543 78,559 Total Debt 12,829 10,608 7,099 3, Other Liabilities 2,275 1,965 2,694 3,167 Total Liabilities 57,620 66,092 72,337 85,126 Net Fixed Assets 41,501 47,896 49,570 48,428 Goodwill Investments 1,544 2,663 2,663 2,663 Net Current Assets 8,204 7,974 12,167 25,701 Cash & Equivalents 6,699 6,953 6,094 9,774 Other Current Assets 34,356 35,092 39,750 44, Current Liabilities 32,851 34,071 33,678 28,673 Other Assets 6,371 7,559 7,937 8,334 Total Assets 57,620 66,092 72,337 85,126 Quarterly Financials Y/e March Q3FY16 Q4FY16 Q1FY17 Net Revenue 24,284 24,491 22,871 23,531 EBITDA 5,787 5,814 5,239 5,160 % of revenue 23.8 23.7 22.9 21.9 Depr. & Amortization 770 783 843 864 Net Interest 126 100 140 187 Other Income 255 241 153 236 Profit before Tax 5,146 5,172 4,409 4,345 Total Tax 1,149 1,259 966 1,068 Profit after Tax 3,905 3,879 3,371 3,172 Adj. PAT 3,896 3,887 3,551 3,362 Key Operating Metrics Y/e March 2015 2016 2017E 2018E US Formulations 33,932 40,215 44,807 47,047 Domestic Formulations 26,772 29,732 34,806 39,331 Consumer Healthcare 4,430 4,570 4,643 4,762 Income from JVs 4,721 5,342 4,857 4,811. October 26, 2016 9
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