Result is in line; Tall guidance for US, Delivery remains clouded May 15, 2016 Surajit Pal surajitpal@plindia.com +912266322259 Rating Reduce Price Rs327 Target Price Rs338 Implied Upside 3.4% Sensex 25,490 Nifty 7,815 (Prices as on May 13, 2016) Trading data Market Cap. (Rs bn) 563.3 Shares o/s (m) 1,725.0 3M Avg. Daily value 340.9 Major shareholders Promoters 74.79% Foreign 7.03% Domestic Inst. 7.20% Public & Other 10.86% Stock Performance (%) 1M 6M 12M Absolute 2.0 (20.8) 0.8 Relative 2.5 (20.3) 7.3 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 15.7 16.0 1.9 2018 23.8 19.6 21.7 Price Performance (RIC: CADI.BO, BB: CDH IN) (Rs) 500 300 100 0 May15 Jul15 Source: Bloomberg Sep15 Nov15 Jan16 Mar16 May16 Sales, margins in line: Cadila s sales of Rs 24.4bn grew 7%, marginally above our estimates of Rs 24.2bn. Sequentially, Gross margin was flat at 6465% while core EBITDA margin increased by 120bps YoY to 21% due to lower SGA costs and R&D expenses. Given the long list of molecules (Vaccines, generic and NCEs) in R&D pending list and unresolved Warning letter on Moraya plant, we remain concerned on the sustainability of the lower costs in SGA and R&D exps. Cadila s R&D expenses (Rs1.8bn) were 8% of sales in Q4FY16 vs 10.2% in Q3FY16. Its US sales were US$145m vs our estimates of US$155m mainly due to pricing pressure post supply restoration by IPCA/Sun Pharma. Management guided for 20 new approvals in FY17E including products which are site transferred from Moraya to Baddi. US sales down by 8.5% YoY, 11% QoQ: While volume and market share remains steady, Cadila s largest contributor drug in US, HCQS, experienced strong price competition from IPCA/Sun. This has resulted in lower sales in US generics as HCQS has been a large contriutor of incremental growth in Cadila s US sales since Q2FY15. India sales to grow at 15% from H2FY17E: With 13% YoY growth in Q4FY16, Cadila s domestic sales seems to have improved to double digit growth (at par with peers) as it has been growing over 10% consistently post Q1FY16. New launches and introduction of vaccines to be mainstay in near term for India. Valuation Maintain Reduce, retain TP at Rs338: With weak visibility in resolution of Moraiya plant, Cadila plans to site transfer key pending ANDAS such as Asacol HD, Lialda and Prevacid ODT to Baddi and SEZ plants. Management expects to launch 20 US generics though clarity on guidance will only be in Q2FY17E. 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 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 16,113 24,384 EPS (Rs) 11.2 16.8 15.7 23.8 Growth (%) 43.2 49.4 (6.3) 51.3 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 26.1 31.3 RoCE (%) 22.8 29.0 23.1 29.2 EV / sales (x) 4.0 3.5 3.2 2.9 EV / EBITDA (x) 21.3 15.3 15.0 12.8 PE (x) 29.1 19.4 20.7 13.7 P / BV (x) 7.9 6.2 4.8 3.9 Net dividend yield (%) 0.7 0.5 0.5 0.5 Source: Company Data; PL Research Q4FY16 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 Q4FY16 conference call Cadila site transferred 5 additional drugs in Q4FY16 with the transfer process started for additional 4 key drugs (Asacol HD, Lialda, PrevacidODT, ToprolXL) from Moraya facility. With production 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 12 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 near term. Management believes there will not be additional remediation costs as it incurs only internal resources to achieve resolution with USFDA 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 its 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 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 its sole exclusivity by another 24 months In line with the industry trend, with few launches and currency depreciation, Cadila s Brazil sales remain tepid at 1% YoY growth in Q4FY16. 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 1.5bn) increased by 24% YoY in Q4FY16 and management expects single digit growth is likely possible going forward. Prospect on the main JV partner Hospira remain uncertain post its acquisition by Pfizer Cadila s other operating income grew by 79% YoY in Q4FY16, taking the new benefits of higher rate (2.2%) of export benefits R&D costs are guided to remain 78% in FY17E though there many clinical trials requirement left for pending filings of its list of NCE molecules in regulated markets and key products in transdermal patches in US. 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) With the exhaustion of tax break, the company had increased tax rates of 24% and 27% in Q4FY16 and FY16 respectively. Cadila guided for 20% Tax rate in FY17E due to benefits from newly commissioned plants in new facility May 15, 2016 2
Exhibit 1: Q4FY16 Result Overview Y/e March Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 FY16 FY15 YoY gr. (%) Net Sales 24,491 22,882 7.0 24,284 98,376 86,513 13.7 Raw Material 8,228 8,021 2.6 7,996 32,770 31,967 2.5 % of Net Sales 33.6 35.1 32.9 33.3 36.9 Personnel Cost 3,572 3,141 13.7 3,175 13,317 12,085 10.2 % of Net Sales 14.6 13.7 13.1 13.5 14.0 Others 6,877 6,762 1.7 7,326 28,460 24,905 14.3 % of Net Sales 28.1 29.5 30.2 28.9 28.8 Total Expenditure 18,677 17,924 4.2 18,497 74,547 68,956 8.1 EBITDA 5,814 4,959 17.2 5,787 23,829 17,557 35.7 Margin (%) 23.7 21.7 23.8 24.2 20.3 Depreciation 783 755 3.7 770 3,022 2,873 5.2 EBIT 5,031 4,203 19.7 5,017 20,807 14,685 41.7 Other Income 241 203 18.5 255 941 554 69.9 Interest 100 163 (38.6) 126 486 679 (28.4) PBT 5,172 4,244 21.9 5,146 21,262 14,560 46.0 ExtraOrd. Inc./Exps. 26 33 (20.2) 101 325 460 (29.3) Total Taxes 1,259 708 78.0 1,149 5,711 2,594 120.1 ETR (%) 24.3 16.7 22.3 26.9 17.8 Reported PAT 3,887 3,504 10.9 3,896 15,226 11,506 32.3 May 15, 2016 3
Exhibit 2: Major Sources of Revenues Y/e March Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 FY16 FY15 YoY gr. (%) Domestic 10,609 9,604 10.5 9,931 41,148 38,142 7.9 % of Net Sales 43.7 41.8 41.5 42.6 44.1 Formulation 7,674 6,797 12.9 7,130 29,732 26,772 11.1 % of Net Sales 31.6 29.6 29.8 30.8 30.9 API 922 870 6.0 838 3,647 3,723 (2.0) % of Net Sales 3.8 3.8 3.5 3.8 4.3 Consumer HC & Others 1,169 1,114 4.9 1,178 4,570 4,430 3.2 % of Net Sales 4.8 4.9 4.9 4.7 5.1 Animal Healthcare 844 823 2.6 785 3,199 3,217 (0.6) % of Net Sales 3.5 3.6 3.3 3.3 3.7 Exports 13,671 13,362 2.3 13,988 55,450 48,435 14.5 % of Net Sales 56.3 58.2 58.5 57.4 55.9 Formulation 12,212 12,184 0.2 12,986 50,108 43,714 14.6 % of Net Sales 50.3 53.1 54.3 51.9 50.5 North America 9,610 9,789 (1.8) 10,717 40,215 33,932 18.5 EU 706 740 (4.6) 762 2,956 3,376 (12.4) LatAM 553 547 1.1 544 2,177 2,348 (7.3) Emerging markets 1,343 1,108 21.2 963 4,760 4,058 17.3 Total Income from JVs 1,459 1,178 23.9 1,002 5,342 4,721 13.2 % of Net Sales 6.0 5.1 4.2 5.5 5.5 Total 24,280 22,966 5.7 23,919 96,598 86,577 11.6 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 May 15, 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, May 15, 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, May 15, 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% May 15, 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% May 15, 2016 8
Income Statement Y/e March 2015 2016 2017E 2018E Net Revenue 84,971 96,658 105,457 113,257 Raw Material Expenses 31,967 32,770 32,692 33,411 Gross Profit 53,005 63,888 72,766 79,846 Employee Cost 12,085 13,317 14,553 15,629 Other Expenses 24,904 28,460 35,961 38,507 EBITDA 16,015 22,111 22,251 25,709 Depr. & Amortization 2,873 3,022 3,509 3,113 Net Interest 679 486 316 147 Other Income 2,096 4,623 2,109 2,265 Profit before Tax 14,560 23,226 20,535 24,715 Total Tax 2,594 5,711 4,107 Profit after Tax 11,966 17,515 16,428 24,715 ExOd items / Min. Int. 294 275 315 331 Adj. PAT 11,506 17,190 16,113 24,384 Avg. Shares O/S (m) 1,023.7 1,023.7 1,023.7 1,023.7 EPS (Rs.) 11.2 16.8 15.7 23.8 Cash Flow Abstract Y/e March 2015 2016 2017E 2018E C/F from Operations 2,753 11,275 (9,377) 3,291 C/F from Investing 4,352 4,987 5,022 2,825 C/F from Financing (5,121) (4,740) (5,269) (5,557) Inc. / Dec. in Cash 1,984 11,523 (9,624) 559 Opening Cash 4,010 5,994 17,517 7,893 Closing Cash 5,994 17,517 7,893 8,452 FCFF 8,723 15,898 (656) 10,265 FCFE 6,824 13,474 (4,164) 6,565 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 (6.3) 51.3 EPS (%) 43.2 49.4 (6.3) 51.3 Profitability EBITDA Margin (%) 18.8 22.9 21.1 22.7 PAT Margin (%) 13.5 17.8 15.3 21.5 RoCE (%) 22.8 29.0 23.1 29.2 RoE (%) 29.9 35.8 26.1 31.3 Balance Sheet Net Debt : Equity 0.1 0.1 (0.1) Net Wrkng Cap. (days) (16) (60) 69 158 Valuation PER (x) 29.1 19.4 20.7 13.7 P / B (x) 7.9 6.2 4.8 3.9 EV / EBITDA (x) 21.3 15.3 15.0 12.8 EV / Sales (x) 4.0 3.5 3.2 2.9 Earnings Quality Eff. Tax Rate 17.8 24.6 20.0 Other Inc / PBT 14.4 19.9 10.3 9.2 Eff. Depr. Rate (%) 5.5 5.3 5.6 4.6 FCFE / PAT 59.3 78.4 (25.8) 26.9. Balance Sheet Abstract Y/e March 2015 2016 2017E 2018E Shareholder's Funds 42,515 53,519 69,947 86,050 Total Debt 13,032 10,608 7,099 3, Other Liabilities 2,275 1,965 2,691 3,166 Total Liabilities 57,822 66,092 79,737 92,615 Net Fixed Assets 41,501 43,455 44,945 44,636 Goodwill Investments 1,544 2,663 2,663 2,663 Net Current Assets 8,405 7,974 24,192 36,983 Cash & Equivalents 6,699 6,953 7,893 8,452 Other Current Assets 34,356 35,092 43,050 49,173 Current Liabilities 32,650 34,071 26,752 20,642 Other Assets 6,371 7,559 7,937 8,334 Total Assets 57,822 61,650 79,737 92,615 Quarterly Financials Y/e March Q1FY16 Q2FY16 Q3FY16 Q4FY16 Net Revenue 25,007 24,595 24,284 24,491 EBITDA 6,015 6,213 5,787 5,814 % of revenue 24.1 25.3 23.8 23.7 Depr. & Amortization 737 733 770 783 Net Interest 134 127 126 100 Other Income 208 237 255 241 Profit before Tax 5,353 5,591 5,146 5,172 Total Tax 1,723 1,580 1,149 1,259 Profit after Tax 3,555 3,912 3,905 3,879 Adj. PAT 3,534 3,909 3,896 3,887 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. May 15, 2016 9
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