Sales marginally better, EBITDA disappoints February 08, 2016 Surajit Pal surajitpal@plindia.com +912266322259 Rating Reduce Price Rs326 Target Price Rs338 Implied Upside 3.7% Sensex 24,617 Nifty 7,489 (Prices as on February 05, 2016) Trading data Market Cap. (Rs bn) 563.1 Shares o/s (m) 1,725.0 3M Avg. Daily value 995.2 Major shareholders Promoters 74.79% Foreign 7.03% Domestic Inst. 7.20% Public & Other 10.86% Stock Performance (%) 1M 6M 12M Absolute 4.1 (15.0) 11.8 Relative 7.9 (2.2) 26.4 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 15.3 16.7 8.2 2018 23.8 20.7 15.2 Price Performance (RIC: CADI.BO, BB: CDH IN) (Rs) 500 300 100 0 Feb15 Apr15 Source: Bloomberg Jun15 Aug15 Oct15 Dec15 Feb16 Q3FY16 Sales driven by higher HCQS sales in US: Cadila s sales (Rs 23.4bn) grew by 8.4%, marginally higher than our estimates of a growth of 7.4%. Sequentially, Gross margin was flat at 66% while core EBITDA margin decreased 160bps to 21% due to higher R&D costs. Cadila s R&D expenses (Rs 2.4bn) were 10.2% of sales in Q3FY16 vs 7.3% in Q2FY16. Its US sales were US$162m vs our estimates of US$150m mainly on the back of higher volume of HCQS. The management expects no additional remediation costs to impact EBITDA margin post warning letter in Moraya plant and is confident to achieve resolution in 68 months. They expects large number of US approvals from Baddi and SEZ plant in FY17 and FY18. US sales grow by 20% YoY: With favourable forex benefits and higher volume of HCQS sales, Cadila s US sales grew by 20% YoY and 7% QoQ. In absence of approvals in major generics, launches of Morphine sulfate, better market share of Tamsulosin and Potassium citrate continued to support growth of core portfolio. Cadila initiated site transfer of key paraiv drugs from Moraya facility. India sales to grow at 15% from H2FY17E: While Cadila s domestic formulation business remained below peers, they expects to grow at 15% Yoy from H2FY17E. The management however remianed concerned on aligining NLEM drugs with negative WPI in FY17E. The new NLEM list of drugs (released in Dec2015) is expected to impact its India sales and PAT by Rs300m in FY17E. Valuation Maintain Reduce, retain TP at Rs338: With weak visibility in resolution of Moraiya plant, Cadila plans to site transfer key US generics including Asacol HD, Lialda and Prevacid ODT to Baddi and SEZ plants. Management expects refiling and approvals of the major generics to be realised in 15 months since initiating of site transfer. Higher sales of CRAMS and Sofosovir contributions are the only positive outcome, while fundamentals of rest of nonus business remains static. We maintian Reduce and retain TP at Rs338. Key financials (Y/e March) 2015 2016E 2017E 2018E Revenues 84,971 93,325 102,433 114,145 Growth (%) 20.4 9.8 9.8 11.4 EBITDA 16,015 19,318 21,613 25,911 PAT 11,506 13,821 15,679 24,411 EPS (Rs) 11.2 13.5 15.3 23.8 Growth (%) 43.2 20.1 13.4 55.7 Net DPS (Rs) 2.4 1.5 1.5 1.5 Profitability & Valuation 2015 2016E 2017E 2018E EBITDA margin (%) 18.8 20.7 21.1 22.7 RoE (%) 29.9 28.6 25.6 32.1 RoCE (%) 22.8 22.9 21.6 28.4 EV / sales (x) 4.0 3.6 3.3 2.9 EV / EBITDA (x) 21.3 17.6 15.6 12.8 PE (x) 29.0 24.2 21.3 13.7 P / BV (x) 7.9 6.2 4.9 4.0 Net dividend yield (%) 0.7 0.5 0.5 0.5 Source: Company Data; PL Research Q3FY16 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 Q3FY16 conference call Cadila site transferred 3 additional drugs in Q3FY16 with the transfer process started for additional 4 key drugs (Asacol HD, Lialda, PrevacidODT, ToprolXL) from Moraya facility. With productions of three validation batches for each of the new drugs and generation of new data, management requires 12 months to complete site transfer process and require another 36 months for product approvals from USFDA. Currently, it completed transfer of 11 products, of which 9 products are approved and commercialised in US Without specific guidance on resolution, management expects key investigation of first observation (out of two observations mentioned in warning letter) to be completed in 36 months. They confirmed that the operation of Zyfin facility has been completely discontinued post warning letter and will take the remediation measure later, without mentioning any specific timeline. Cadila will have to decide on the launch of AG (authorised generic) of Asacol HD by JunJul 2016 if there is no visibility of launching their own paraiv by the timeline. Currently, Cadila has settlement with patent holders to launch the AG of Asacol HD if they fail to receive approvals from USFDA in six months post patent expiry of the drug. Asacol HD (US mkt size: US$750m) remains most important drugs for Cadila as it has exclusivity of 180 days in US and management believes with no visibility of next paraiv filers, this will increase its sole exclusivity by another 24 months In line with the industry trend, with few launches and currency depreciation, Cadila s Brazil sales decreased by 11% YoY in Q3FY16. 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. Joint venture sales (Rs 1bn) decreased by 18% YoY in Q3FY16 and management expects single digit growth is likely possible going forward. Earlier, management had guided for sustainable quarterly revenues of Rs1.45bn from JV to remain sustainable in the coming quarters Cadila s other operating income grew by 189% YoY in Q3FY16. R&D costs are guided to remain 77.5% range in FY16E and FY17E though it was 10.2% in Q3FY16. The company is in the process of filing three biosimilars in US in the neartomedium term. We expect a large part of biosimilar costs to be capitalised. Currently, there are more than 160 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) With the exhaustion of tax break, the company has increased tax rates to be at 25% from 21% in FY16E and once they commission the new facility in FY17, they expects it to come down to 20% in FY17E. February 08, 2016 2
Exhibit 1: Q3FY16 Result Overview Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Net Sales 24,284 21,895 10.9 24,595 73,886 63,475 16.4 Raw Material 7,996 7,591 5.3 8,066 24,542 23,945 2.5 % of Net Sales 32.9 34.7 32.8 33.2 37.7 Personnel Cost 3,175 3,170 0.1 3,340 9,745 8,944 9.0 % of Net Sales 13.1 14.5 13.6 13.2 14.1 Others 7,326 6,661 10.0 6,976 21,583 18,143 19.0 % of Net Sales 30.2 30.4 28.4 29.2 28.6 Total Expenditure 18,497 17,423 6.2 18,382 55,870 51,033 9.5 EBITDA 5,787 4,472 29.4 6,213 18,015 12,443 44.8 Margin (%) 23.8 20.4 25.3 24.4 19.6 Depreciation 770 707 8.9 733 2,239 2,117 5.8 EBIT 5,017 3,765 33.3 5,480 15,776 10,326 52.8 Other Income 255 100 154.7 237 701 350 100.0 Interest 126 162 (22.4) 127 386 516 (25.1) PBT 5,146 3,703 39.0 5,591 16,090 10,160 58.4 ExtraOrd. Inc./Exps. 101 93 9.2 102 300 272 10.2 Total Taxes 1,149 791 45.3 1,580 4,452 1,887 135.9 ETR (%) 22.3 21.4 28.3 27.7 18.6 Reported PAT 3,896 2,819 38.2 3,909 11,339 8,002 41.7 February 08, 2016 3
Exhibit 2: Major Sources of Revenues Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Domestic 9,931 9,333 6.4 10,343 30,539 28,537 7.0 % of Net Sales 41.5 42.5 42.8 42.2 44.9 Formulation 7,130 6,418 11.1 7,513 22,059 19,975 10.4 % of Net Sales 29.8 29.2 31.1 30.5 31.4 API 838 959 (12.6) 907 2,725 2,853 (4.5) % of Net Sales 3.5 4.4 3.8 3.8 4.5 Consumer HC & Others 1,178 1,140 3.3 1,116 3,401 3,316 2.6 % of Net Sales 4.9 5.2 4.6 4.7 5.2 Animal Healthcare 785 816 (3.8) 807 2,354 2,393 (1.6) % of Net Sales 3.3 3.7 3.3 3.3 3.8 Exports 13,988 12,646 10.6 13,838 41,778 35,073 19.1 % of Net Sales 58.5 57.5 57.2 57.8 55.1 Formulation 12,986 11,429 13.6 12,415 37,895 31,531 20.2 % of Net Sales 54.3 52.0 51.3 52.4 49.6 North America 10,717 8,959 19.6 10,038 30,605 24,144 26.8 EU 762 847 (10.0) 652 2,250 2,636 (14.6) LatAM 544 610 (10.8) 527 1,624 1,801 (9.8) Emerging markets NA 2 NA 963 1,013 (4.9) 1,198 3,416 2,948 15.9 Total Income from JVs 1,002 1,217 (17.7) 1,423 3,883 3,542 9.6 % of Net Sales 4.2 5.5 5.9 5.4 5.6 Total 23,919 21,979 8.8 24,181 72,317 63,610 13.7 Exhibit 1: India Formulations just crossed threshold of double digit growth in Q2FY16 8,000 7,000 6,000 5,000 4,000 3,000 2,000 February 08, 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, February 08, 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, Exhibit 7: Income from JV: Additions of new products, clients drive growth 1, 1, 1, February 08, 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 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% February 08, 2016 7
Exhibit 11: PAT & PAT Margins PAT Margin (%) (RHS) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 500 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% February 08, 2016 8
Income Statement Y/e March 2015 2016E 2017E 2018E Net Revenue 84,971 93,325 102,433 114,145 Raw Material Expenses 31,967 29,864 31,754 33,673 Gross Profit 53,005 63,461 70,679 80,472 Employee Cost 12,085 12,879 14,136 15,752 Other Expenses 24,905 31,264 34,930 38,809 EBITDA 16,015 19,318 21,613 25,911 Depr. & Amortization 2,873 3,014 3,167 3,138 Net Interest 679 494 377 208 Other Income 2,096 1,960 2,049 2,283 Profit before Tax 14,560 17,770 20,118 24,847 Total Tax 2,594 3,554 4,024 Profit after Tax 11,966 14,216 16,094 24,847 ExOd items / Min. Int. 294 395 415 436 Adj. PAT 11,506 13,821 15,679 24,411 Avg. Shares O/S (m) 1,023.7 1,023.7 1,023.7 1,023.7 EPS (Rs.) 11.2 13.5 15.3 23.8 Cash Flow Abstract Y/e March 2015 2016E 2017E 2018E C/F from Operations 2,753 (2,124) (390) 4,146 C/F from Investing 4,352 5,022 5,022 2,815 C/F from Financing (5,121) (1,630) (4,108) (6,144) Inc. / Dec. in Cash 1,984 1,267 525 817 Opening Cash 4,010 5,994 7,261 7,786 Closing Cash 5,994 7,261 7,786 8,603 FCFF 8,722 1,820 4,174 10,921 FCFE 6,823 2,183 1,896 6,694 Key Financial Metrics Y/e March 2015 2016E 2017E 2018E Growth Revenue (%) 20.4 9.8 9.8 11.4 EBITDA (%) 54.6 20.6 11.9 19.9 PAT (%) 43.2 20.1 13.4 55.7 EPS (%) 43.2 20.1 13.4 55.7 Profitability EBITDA Margin (%) 18.8 20.7 21.1 22.7 PAT Margin (%) 13.5 14.8 15.3 21.4 RoCE (%) 22.8 22.9 21.6 28.4 RoE (%) 29.9 28.6 25.6 32.1 Balance Sheet Net Debt : Equity 0.1 0.1 Net Wrkng Cap. (days) (16) 71 121 196 Valuation PER (x) 29.0 24.2 21.3 13.7 P / B (x) 7.9 6.2 4.9 4.0 EV / EBITDA (x) 21.3 17.6 15.6 12.8 EV / Sales (x) 4.0 3.6 3.3 2.9 Earnings Quality Eff. Tax Rate 17.8 20.0 20.0 Other Inc / PBT 14.4 11.0 10.2 9.2 Eff. Depr. Rate (%) 5.5 5.2 5.1 4.6 FCFE / PAT 59.3 15.8 12.1 27.4. Balance Sheet Abstract Y/e March 2015 2016E 2017E 2018E Shareholder's Funds 42,515 54,283 68,108 84,204 Total Debt 13,032 13,395 11,117 6,890 Other Liabilities 2,275 3,025 3,843 4,426 Total Liabilities 57,822 70,704 83,067 95,519 Net Fixed Assets 41,501 43,487 45,320 44,975 Goodwill Investments 1,544 1,544 1,544 1,544 Net Current Assets 8,405 18,983 29,179 41,624 Cash & Equivalents 6,699 7,261 7,786 8,603 Other Current Assets 34,356 39,810 45,850 52,429 Current Liabilities 32,650 28,089 24,457 19,407 Other Assets 6,371 6,690 7,024 7,376 Total Assets 57,822 70,704 83,067 95,519 Quarterly Financials Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Net Revenue 22,882 25,007 24,595 24,284 EBITDA 4,959 6,015 6,213 5,787 % of revenue 21.7 24.1 25.3 23.8 Depr. & Amortization 755 737 733 770 Net Interest 163 134 127 126 Other Income 203 208 237 255 Profit before Tax 4,244 5,353 5,591 5,146 Total Tax 708 1,723 1,580 1,149 Profit after Tax 3,468 3,555 3,912 3,905 Adj. PAT 3,504 3,534 3,909 3,896 Key Operating Metrics Y/e March 2015 2016E 2017E 2018E US Formulations 33,932 37,420 41,537 46,427 Domestic Formulations 26,772 30,802 34,806 39,331 Consumer Healthcare 4,430 4,528 4,643 4,762 Income from JVs 4,704 4,644 4, 4,783. February 08, 2016 9
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