US, India traction lead Q2 beat; Sustainability to drive valuation November 14, 2017 Surajit Pal surajitpal@plindia.com +912266322259 Rating Accumulate Price Rs449 Target Price Rs519 Implied Upside 15.6% Sensex 32,942 Nifty 10,187 (Prices as on November 14, 2017) Trading data Market Cap. (Rs bn) 773.7 Shares o/s (m) 1,725.0 3M Avg. Daily value 579.9 Major shareholders Promoters 74.87% Foreign 9.77% Domestic Inst. 7.43% Public & Other 7.93% Stock Performance (%) 1M 6M 12M Absolute (10.6) (7.8) 17.7 Relative (12.1) (17.0) (5.1) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 24.6 19.2 28.1 2019 23.6 24.5 3.8 Price Performance (RIC: CADI.BO, BB: CDH IN) (Rs) 500 300 100 0 Nov16 Jan17 Source: Bloomberg Mar17 May17 Jul17 Sep17 Nov17 All over beat led by glialda, acquisition of Merck brands in India: With 15% YoY adj. growth in India formulations and 72% QoQ growth in US generics, Cadila s (CDH) revenues, adj. EBITDA and PAT grew by 35%, 52% and 32% YoY, respectively. The strong traction of glialda and volume growth in US generics as well as additional sales from six brands acquired from MSD in India led the strong performance of CDH as it beats our estimates of sales, adj. EBITDA and PAT by 21%, 26% and 16% respectively in. With resolution in Ahmedabad SEZ plant and 170 pending ANDAs, CDH guided for similar strong traction in US generics in Q3FY18 on the back of exclusivity sales of glialda. Adj. gross margin and adj. EBITDA margin increased by 395bps and 1,456bps QoQ to 65.1% and 24.7% respectively in. While there are improvement in restocking of inventory from channel partners, CDH guided that there are further room for improvement in H2FY18. Key launches to drive US generic growth in H2FY18, FY19: With four and seven launches in and H1FY18, CDH guided priority launching of 15 drugs in FY18E and 40 drugs in FY19. Management maintians that gtamiflu PFOS, gtoprol XL and Prevacid ODT to be key launches in H2FY18E while Transdermals, Injectables and Albendazole to be key launches in FY19E. With support of volumes in key drugs in current portfolio such as AG of Asacol HD, Tamsulosin, Bupropion hcl, we believe glialda contributed US$5060m in US sales of US$255m in ValuationMaintain Accumulate, retain TP at Rs519: CDH trades at PER of 18.3x (FY18E) and 19x (FY19E) with growth traction from launches of exclusive products. India sales growth post GSTled destocking is recovering faster than industry average growth rate. We expect benefits of exclusive launches to signifcantly improve headline margins. We maintain our Accumulate recommendation and retain TP at Rs519 (PE 22x FY19E). Key financials (Y/e March) 2016 2017 2018E 2019E Revenues 96,658 88,799 103,827 107,000 Growth (%) 13.8 (8.1) 16.9 3.1 EBITDA 23,793 11,582 31,408 29,479 PAT 23,378 9,520 25,163 24,154 EPS (Rs) 22.8 9.3 24.6 23.6 Growth (%) 103.2 (59.3) 164.3 (4.0) Net DPS (Rs) 1.5 1.5 1.5 1.5 Profitability & Valuation 2016 2017 2018E 2019E EBITDA margin (%) 24.6 13.0 30.3 27.6 RoE (%) 47.0 15.0 31.8 24.2 RoCE (%) 31.5 9.6 20.0 17.9 EV / sales (x) 4.9 5.6 4.7 4.4 EV / EBITDA (x) 20.0 42.8 15.5 16.1 PE (x) 19.6 48.2 18.3 19.0 P / BV (x) 8.1 6.6 5.2 4.1 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
Key takeaway from conference call CDH received EIR for Ahmedabad SEZ facility in while it received similar EIR in Moraiya and Baddi facilities in With Tentative approvals to Teva, CDH expects new generic to enter in to glialda market in US in January 2018 and few more (23 companies) post March 2018. Management however do not expect crowded market, unlike other generics, in glailda due to natural entry barrier of complex technology Management expects US base business erosion to be 1012% in FY18E and 8 10% in FY19E. It has guided for overall US revenue (reported) growth in FY19E despite high base due to glialda sales in 180days exclusivity in FY18E Management guided that increase in gross margins was majorly due to consolidation of acquired MSD portfolio in India, glialda and restocking of India formulations. CDH expect further improvement restocking post GST scenario with guidance of 15% YoY growth in H2FY19 Management maintained that it has received TAD for Metoprolol XR in March 2018 and guided for launch of gprevacid ODT in Q3FY18E. With difficulties in API sourcing for Renvela, management has not given any guidance on launch of Renvela in near future FY18E Latam and emerging market sales increased by 3% and 16% YoY respectively while EU sales declined by 2.3% YoY respectively in R&D costs were Rs2.8bn, 8.7% of adj sales in. CDH guided R&D costs to be in the range of 78% of sales in FY18E and FY19E despite requirements of many clinical trials of NCE molecules and biosim products in regulated markets, and key transdermal patches in US. CDH guided for gexelon transdermal patch in FY19E while there remain pending queries on gduragesic transdermal patch Cadila guided for tax rate of 2225% and 1820% in FY18E and FY19E respectively. The higher tax rate in FY18E is due to strong sales of glialda in US and lower in FY19 due to more exports from Ahmedabad SEZ and lower sales of glialda Cadilla incurred capex of Rs5.09bn in H1FY18in and management guided for capex of Rs1012bn in FY18E including capex in Moraiya and Baddi, where they are expecting approvals. November 14, 2017 2
Exhibit 1: Result Overview Y/e March YoY gr. (%) H1FY18 H1FY17 YoY gr. (%) Net Sales 32,340 23,531 37.4 21,973 54,313 46,402 17.0 Raw Material 11,007 8,432 30.5 8,294 19,301 16,173 19.3 % of Net Sales 34.0 35.8 37.7 35.5 34.9 Personnel Cost 4,592 3,715 23.6 4,288 8,880 7,287 21.9 % of Net Sales 14.2 15.8 19.5 16.3 15.7 Others 8,170 6,266 30.4 6,618 14,788 12,585 17.5 % of Net Sales 25.3 26.6 30.1 27.2 27.1 Total Expenditure 23,769 18,413 29.1 19, 42,969 36,045 19.2 EBITDA 8,571 5,118 67.5 2,773 11,344 10,357 9.5 Margin (%) 26.5 21.8 12.6 20.9 22.3 Depreciation 1,267 864 46.6 1,220 2,487 1,707 45.7 EBIT 7,304 4,254 71.7 1,553 8,857 8,650 2.4 Other Income 225 236 (4.7) 210 435 389 11.8 Interest 406 145 180.0 219 625 285 119.3 PBT 7,123 4,345 63.9 1,544 8,667 8,754 (1.0) ExtraOrd. Inc./Exps. (33) (99) (66.7) (133) (166) (218) (23.9) Total Taxes 2,123 645 229.1 293 2,416 1,189 103.2 ETR (%) 29.8 14.8 19.0 27.9 13.6 Reported PAT 5,033 3,799 32.5 1,384 6,417 7,783 (17.6) Other Comprehensive Income (135) (14) 416 281 (25) Total Comprehensive Income 4,898 3,785 29.4 1, 6,698 7,758 (13.7) November 14, 2017 3
Exhibit 2: Major Sources of Revenues Y/e March YoY gr. (%) H1FY18 H1FY17 YoY gr. (%) Domestic 12,348 11,385 8.5 9,266 21,614 22,481 (3.9) % of Net Sales 39.1 47.7 42.8 40.6 48.4 Formulation 8,945 8,209 9.0 6,374 15,319 16,071 (4.7) % of Net Sales 28.4 34.4 29.4 28.8 34.6 API 929 832 11.7 689 1,618 1,808 (10.5) % of Net Sales 2.9 3.5 3.2 3.0 3.9 Consumer HC & Others 1,198 1,119 7.1 1,146 2,344 2,280 2.8 % of Net Sales 3.8 4.7 5.3 4.4 4.9 Animal Healthcare 1,276 1,225 4.2 1,057 2,333 2,322 0.5 % of Net Sales 4.0 5.1 4.9 4.4 5.0 Exports 19,201 12,483 53.8 12,406 31,607 24,011 31.6 % of Net Sales 60.9 52.3 57.2 59.4 51.6 Formulation 18,964 12,231 55.0 11,995 30,959 23,369 32.5 % of Net Sales 60.1 51.2 55.3 58.2 50.3 North America 16,436 9,888 66.2 9,650 26,086 18,371 42.0 EU 544 557 (2.3) 608 1,152 1,349 (14.6) LatAM 675 656 2.9 509 1,184 1,183 0.1 Emerging markets 1,309 1,130 15.8 1,228 2,537 2,466 2.9 Income from JVs 237 252 (6.0) 411 648 642 0.9 % of Net Sales 0.8 1.1 1.9 1.2 1.4 Total 31,549 23,868 32.2 21,672 53,221 46,492 14.5 Exhibit 1: India Formulations 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Q1FY17 November 14, 2017 4
Exhibit 2: US Generics: benefits of additional HCQS sales set to be neutralised in Q3FY16E 18,000 16,000 14,000 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, November 14, 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, November 14, 2017 6
Exhibit 8: Sales & Sales Growth Sales YoY gr. (%) (RHS) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 (5.0) (10.0) Exhibit 9: Other Operating Revenues: IPR sales of ANDA drives last two qtr sales 1, 1, Exhibit 10: EBITDA & EBITDA Margin EBITDA Margin (%) (RHS) 9,000 8,000 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% November 14, 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% November 14, 2017 8
Income Statement Y/e March 2016 2017 2018E 2019E Net Revenue 96,658 88,799 103,827 107,000 Raw Material Expenses 30,959 34,451 28,033 29,960 Gross Profit 65,699 54,348 75,794 77,040 Employee Cost 12,616 15,002 15,574 16,799 Other Expenses 29,290 27,764 28,812 30,763 EBITDA 23,793 11,582 31,408 29,479 Depr. & Amortization 2,921 3,750 3,986 4,414 Net Interest 528 450 326 223 Other Income 4,707 3,383 3,530 3,852 Profit before Tax 25,051 10,765 30,626 28,694 Total Tax 1,774 1,289 5,513 4,591 Profit after Tax 23,277 9,476 25,114 24,103 ExOd items / Min. Int. (151) (50) (49) (52) Adj. PAT 23,378 9,520 25,163 24,154 Avg. Shares O/S (m) 1,024.0 1,024.0 1,024.0 1,024.0 EPS (Rs.) 22.8 9.3 24.6 23.6 Cash Flow Abstract Y/e March 2016 2017 2018E 2019E C/F from Operations 19,938 (38,447) (5,101) (3,101) C/F from Investing (9,039) 31,455 10,022 10,022 C/F from Financing (9,527) 13,152 (7,085) (5,872) Inc. / Dec. in Cash 1,372 6,159 (2,164) 1,049 Opening Cash 7,904 9,276 15,435 13,271 Closing Cash 9,276 15,435 13,271 14,320 FCFF 20,836 (14,635) 15,662 13,775 FCFE 18,818 14,312 3,954 2,906 Key Financial Metrics Y/e March 2016 2017 2018E 2019E Growth Revenue (%) 13.8 (8.1) 16.9 3.1 EBITDA (%) 48.6 (51.3) 171.2 (6.1) PAT (%) 103.2 (59.3) 164.3 (4.0) EPS (%) 103.2 (59.3) 164.3 (4.0) Profitability EBITDA Margin (%) 24.6 13.0 30.3 27.6 PAT Margin (%) 24.2 10.7 24.2 22.6 RoCE (%) 31.5 9.6 20.0 17.9 RoE (%) 47.0 15.0 31.8 24.2 Balance Sheet Net Debt : Equity 0.3 0.5 0.3 0.1 Net Wrkng Cap. (days) 69 107 108 108 Valuation PER (x) 19.6 48.2 18.3 19.0 P / B (x) 8.1 6.6 5.2 4.1 EV / EBITDA (x) 20.0 42.8 15.5 16.1 EV / Sales (x) 4.9 5.6 4.7 4.4 Earnings Quality Eff. Tax Rate 7.1 12.0 18.0 16.0 Other Inc / PBT 18.8 31.4 11.5 13.4 Eff. Depr. Rate (%) 5.0 4.6 4.3 4.3 FCFE / PAT 80.5 150.3 15.7 12.0. Balance Sheet Abstract Y/e March 2016 2017 2018E 2019E Shareholder's Funds 56,992 69, 88,581 110,880 Total Debt 22,646 51,593 39,885 29,015 Other Liabilities (1,818) (2,445) (1,882) (1,360) Total Liabilities 77,820 118,748 126,584 138,535 Net Fixed Assets 46,987 72,984 78,998 84,585 Goodwill Investments 4,162 4,348 4,348 4,348 Net Current Assets 18,312 31,443 32,766 38,608 Cash & Equivalents 6,387 15,435 13,271 14,320 Other Current Assets 34,426 44,297 47,169 49,587 Current Liabilities 22,501 28,289 27,674 25,299 Other Assets 8,359 9,973 10,472 10,995 Total Assets 77,820 118,748 126,584 138,535 Quarterly Financials Y/e March Net Revenue 23,638 25,249 21,973 32,340 EBITDA 4,043 4,636 2,773 8,571 % of revenue 17.1 18.4 12.6 26.5 Depr. & Amortization 898 1,145 1,220 1,267 Net Interest 66 99 219 406 Other Income 166 731 210 225 Profit before Tax 3,245 4,123 1,544 7,123 Total Tax 81 19 293 2,123 Profit after Tax 3,240 4,163 1,598 4,772 Adj. PAT 3,239 4,163 1, 4,898 Key Operating Metrics Y/e March 2016 2017 2018E 2019E US Formulations 40,215 36,603 45,175 42,851 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. November 14, 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 % of Total Coverage 50% 40% 30% 20% 10% 0% 44.5% 39.1% 16.4% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12months 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. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or comanaged public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated brokerdealer and therefore the analyst(s) is/are not subject to supervision by a U.S. brokerdealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered brokerdealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. November 14, 2017 10