Cadila performance allays Street concerns

US FDA's observation on Moraiya plant not seen as a cause for worry

Cadila Healthcare's performance for the December quarter beat consensus Street estimates on profitability. This helped the stock pare two per cent of the losses in the past two trading sessions, after seeing a 10 per cent correction between January 29 and February 5. Sales were Rs 2,130 crore, in line with the Rs 2,169 crore Bloomberg consensus estimate.

Earnings before interest, taxes, depreciation and amortisation (Ebitda) were Rs 444 crore, against the estimate of Rs 437 crore. Margins (20.3 per cent) grew 152 basis points over a year. Lower other income and higher minority interests saw profits growing 52 per cent over a year to Rs 282 crore, slightly lower than the Rs 286 crore Street estimates.

Higher sales in the US, emerging markets and of joint ventures helped post robust performance. Its US business grew 42 per cent and emerging market business rose 23 per cent. Cadila filed five Abbreviated New Drug Applications (ANDAs), taking the cumulative filings to 255. The consumer API and domestic formulations businesses (38.5 per cent of gross revenue) grew 11 per cent, while exports (56 per cent to total sales) grew 22.2 per cent.

US sales are growing at a good pace, with the new launch approval rate healthier than earlier. December figures show trailing three-month sales, growing the most for Cadila (up 14 per cent). These were driven by Arthritis treatment Plaquenil tablets seeing price increases after IPCA's exit in June, say analysts at Nomura. Kidney treatment Urokit-K generics has gained strong 35 per cent market share. Hitesh Mahida at Antique Stock Broking says the two products will be significant drivers of profit in the second half of FY15.

Analysts at HSBC say Cadila has the second-largest coverage in terms of ANDAs pending approval in the US (156). They add its Nesher unit getting the Food and Drug Administration clearance this year can increase the pace of controlled substances approvals. US sales will nearly double from the current $360 million to $710 million by FY17. The domestic market is expected to grow at a 15 per cent CAGR (compound annual growth rate) during FY14-16, on the back of additional investments and a shift in the portfolio mix to chronic remedies.

The flip side, concerns on the FDA observations after the July inspection of its Moraiya (Gujarat) unit, have kept the Street nervous, even as the management does not see any cause of worry. Analysts like Mahida have a target price of Rs 1,852, while HSBC analysts had raised their target price to Rs 1,900 last week.