Cadila Healthcare: Strong triggers ahead

Price rises and robust product pipeline in the US have led to earnings upgrades

Cadila Healthcare has seen earnings upgrades recently, on the back of price increases and a strong pipeline in the US.

Further, expectation of a double-digit growth in the Indian market is expected to add to revenue growth. A few brokerages have the stock as their top pick among large-cap pharmaceutical companies. The stock has been among the star performers in the pharmaceutical space, doubling investors' money over the past year.

There are a couple of triggers for the stock. The short-term one is the price rise in anti-malarial drug HydroxyChloroquine. The company took a price rise of three and a half times for the drug in the US market in August, due to lower competition. IPCA Labs-Ranbaxy has had to discontinue sale of the drug on regulatory issues at IPCA’s Ratlam plant.

Analysts at Credit Suisse believe the price rise is expected to add about 15 per cent to FY16 earnings per share. The rise have nearly tripled the market size of the drug to $90 million. Cadila is the only vertically integrated player for this drug and as the price rise was taken in August, the company will see the impact in the December quarter results. In an otherwise muted quarter for the sector, profits at the operating level for the company are expected to see a 37 per cent jump year on year to Rs 405 crore, while net profits could see a jump of 56 per cent to Rs 290 crore. Revenues in the quarter are expected to be boosted by a 16 per cent jump over the year-ago period to Rs 2,139 crore.

Credit Suisse has a target price of Rs 1,900 for the stock valuing the company at 20 times its FY17 earnings per share.

In addition to this drug, analysts have also upgraded the earnings per share, on the back of a strong US pipeline. Antique Stock Broking’s Hitesh Mahida believes the company's current market price does not factor in major positive surprises like anti-inflammatory Lialda and Prevacid (anti-ulcer,) which could result in an FY16 earnings upgrade of 30 per cent.

The company has a pipeline of 150 Abbreviated New Drug Applications, pending approval with the US Food and Drug Administration. Sixty per cent of these are in limited competition segments such as transdermals, dermatology, injectables. At the current price, the stock is trading at 18 times its FY17 earnings estimates.