Cadila Healthcare shines on better prospects, earnings

The company had underperformed the broader markets over last year due to weak growth in the US market

The BSE Healthcare index has been one of the best performing indices in CY13 making investors richer by 22 per cent. However, while the likes of Lupin and Sun Pharma gave returns in the range of 48-54 per cent, Cadila Healthcare disappointed. The stock of the company, which has strong presence both in the US and Indian markets, was down 10.39 per cent over the last year. Its fortunes, according to analysts, are likely to change in the coming financial year, given its strong product portfolio in the US market as well as a pick-up in domestic sales.

In anticipation of better performance and an upgrade by Bank of America Merill Lynch, the stock surged over five per cent to Rs 845 in trade on Wednesday. The research firm, which has upgraded the stock from ‘underperformer’ to ‘buy,’ increased its price target from Rs 705 to Rs 1,000. Manoj Garg and Matthew Prior of the research firm say while there is little upside on the earnings front in the current financial year, earnings accelaration in FY15 is likely to happen on the back of a pick up in US approvals, recovery in domestic growth and base effect of the Hospira joint venture. While the research firm has cut its FY14 earnings estimates by six per cent, they have raised the same for the next two fiscals by three to seven per cent.

“While growth concern in FY14 (six per cent fall) led to stock underperformance, we believe improvement in growth visibility (30 per cent earnings per share compounded annual growth rate estimated over FY14-16) and improvement in return ratios will drive re-rating of the stock and valuations can go back to historical level (19-20x). Further, we believe that with increased assets utilisation and improvement in margins, return rations and balance sheet ratios are set to improve,” they add.

On the US sales front, analysts believe that the company has done well considering the issues at its Moraiya facility. Credit Suisse in a December report on the company said though it was a late entrant in the US market, it has shown good execution so far with an average portfolio (70 per cent of Cadila's products having more than six generic competitors and portfolio market share is at 20 per cent).

“It is good execution considering that last year was a washout for Cadila, due to a warning letter at Moraiya facility that prevented any new approvals,” according to Anubhav Aggarwal and Chunky Shah of the research firm.

The company has a strong US product pipeline, with 33 filed in FY13 and over 35 expected to be filed in FY14, resulting in a large portfolio of 191 filings in all till the September quarter.

However, the delays in approvals has severely impacted the company’s topline and bottomline. After growing at 44 per cent between FY09-12, the company is expected to grow at just 10 per cent over the FY12-14 period.

With resolution of the USFDA issues (plant cleared in July 2012) and the company now expecting higher number of approvals, expect growth rates to pick up. The US opportunity is expected to be strong given the company is likely to get key approvals such as Toprol XL (four-five players in a $400-500 million market) among others. While the company has robust pipeline and new filings are in more profitable niche and limited competition products, successful execution is a key for future growth, believe the BofA-Merrill Lynch analysts.

The company is expected to do well on the domestic front as well. For the December quarter, HDFC Securities analyst Meeta Shetty believes growth here will be led by Cadila, due to a favourable season. The performance is notable, given the rift between chemists and distributors on the one hand and companies on the other. The analyst expects the company’s domestic sales to grow 13 per cent in the quarter as compared to four per cent in the September quarter.

On the impact of the new pricing policy, while this is likely to hamper revenues in the short term, the company is expected to recoup some losses by increasing volumes on drugs which fall under the National List of Essential Medicines (NLEM) and price increases in those that are out of that ambit. For October and November, the company recorded domestic sales growth of 5.5 per cent, with most of the improvement from drugs which are not under NLEM. Sales of drugs under the NLEM were down 12 per cent for the two months as compared to the same period last year. Non-NLEM medicines grew 10 per cent over that period.