Improved performance ahead for Cadila Healthcare

While domestic show could remain robust, growth in US & LatAm could pick up in second half of 2013

While Cadila Healthcare has lagged its pharmaceutical peers on returns in 2012, its performance has not been too bad, at 28 per cent, beating the Sensex’s 26 per cent.

Though the September quarter saw some soft spots due to lower growth in Latin American revenue and just 10 per cent in consumer business growth, expect a pick-up in the second half of FY13. Revenue growth in the key US market is also likely to gain momentum. Deepak Malik at Emkay Global believes the growth momentum will pick up in the second half of FY13, helping the company achieve 22 per cent annual earnings growth over FY12-14E.

Analysts at Motilal Oswal Securities have pegged a higher estimate for earnings growth at 27 per cent over FY12-15 for core operations (excluding one-offs), and return ratios in the 27-28 per cent range on capital employed and on equity. Cadila’s key selling proposition, they say, has been its ability to sustain double-digit growth without diluting return ratios over the past few years. Most analysts have a buy call on the stock, with a target price of around Rs 1,000, translating into an upside of close to 12 per cent from the current level of Rs 894. The stock features among the top picks of brokerages for 2013.

Strong domestic footing
The domestic business contributed 39 per cent to overall revenue in the September quarter and continues to grow faster than the domestic formulations industry. Revenue had grown 28 per cent to around Rs 600 crore during the September quarter and are expected to continue the momentum. In fact, analysts at Motilal Oswal Securities expect 34 per cent growth in the December quarter. While the existing brands are doing well, the growth is being supported by new launches. The company had launched 30 products in the June quarter and 16 in the September one; it is likely to continue the same momentum. The acquisition of Mumbai-based formulations company Biochem is contributing well to the growth, excluding which the domestic sales would have risen 18 per cent during the September quarter. Aided by new launches and impetus from Biochem, the Cadila management had forecast 25-28 per cent growth in domestic business during FY13.
 

HIGHER REVENUE GROWTH
In Rs crore	Q3FY13E	FY12	FY13E
Net revenues	1,674	5,363	6,483
% change y-o-y	21.0	13.7	23.2
Ebitda	322	1,125	1,304
Ebitda (%)	19.2	21.4	20.1
Adjusted net profit	184	566	677
% change y-o-y	21.0	13.7	23.2
EPS (Rs)	-	27.6	33.1
PE (x)	-	32.5	27.1
E: Estimates Consolidated financials Source: Motilal Oswal Securities

On Biochem, analysts at HSBC expect sales contribution of Rs 260 crore during FY13, with business synergies leading to margin improvement and a further ramp-up expected in the coming periods. The company is also focusing on sales force productivity and cost rationalision to improve margins here.

In the consumer business, growth is likely to pick up, aided by the low base of the second half of FY12 and better growth in the Nutralite segment, geographical expansion of the Sugar Free range, better traction in Everyuth and ramp-up in the Acti-Life franchise.

International business holds promise
The US business contributed around 24 per cent to revenue during the September quarter and grew 20 per cent on the back of rupee depreciation. The growth in dollar terms, though, remained flat. The company had 10 new approvals, including high margin injectables, in the quarter. While supply of three injectables had been started in the second quarter, three more are likely to have been launched in the December quarter. Though Cadila was supplying injectables to its partners, the start of its own injectables sales in the US during the second half of FY13 is likely to boost growth.

Further, it has got the US drug regulator’s clearance for its Moraiya facilities and final approvals for five products. However, analysts at Nomura do not expect any of these products to contribute materially in the December quarter. Nevertheless, better traction might come from the March quarter onwards. More product launches in the US in the March quarter would provide further momentum. Its US subsidiary, Nesher Pharma, is said to have launched one product during the December quarter.

The Latin American sales had suffered in the September quarter due to lower sales in Brazil, due to a strike. These are likely to catch up in the December quarter, with operations normalising.

In the joint ventures like those with Hospira, analysts at Nomura expect JV revenues to decline five per cent sequentially, as the September quarter had one-off sales for Docetaxel (cancer drug) to the Hospira JV. However, the company has entered the second phase in the Hospira JV, which includes a potential tie-up of eight to 10 oncology products. These would boost future revenue. On the flip side, the Emkay Global result preview suggests the margins in the December quarter could surprise negatively due to dollar hedges at Rs 50. Nevertheless, over FY12-14, analysts at Axis Capital see a 129-basis point improvement in margins.