Monday, February 13, 2012

>CADILA HEALTHCARE LIMITED: Long term drivers intact

Cadila Healthcare Ltd (CHL) reported a yearly growth of 18.6% & 12% q-o-q mainly on the back of acquisitions done in the past months. Biochem, Bremer & Nesher drives the Topline growth. However EBITDA only grew marginally at 2.1% y-o-y & degrew by - 5.2% q-o-q & stood at Rs 262cr. Operating profit margins stood at 18.9%, a decline of 304bps y-o-y & 339bps q-o-q. Decline of the margins was mainly on the back of contribution from low margin segments. Reported PAT including forex losses stood at
Rs 149cr and adjusted PAT stood at Rs 177cr, in line with our expectations. Net profit margins remained under pressure at 12.8%, a decline of 114bps y-o-y & 276bps q-oq. The lower margins were mainly due to higher depreciation expense partially offset by lower tax expense. Also the interest payment was bit higher both on a sequential & y-o-y basis. Overall the company reported muted performance for the quarter & is
consolidating its past acquisitions which would pay off in the coming quarters.

Q3FY12 Highlights:
■ Top-line growth mainly driven by past acquisitions
The company reported top-line of Rs 1383cr, a growth of 18.6% y-o-y & 11.9% q-o-q. Indian market including Biochem reported a growth of 11.2% y-o-y. The growth was mainly on the back of 15 new product launches including the line extensions. US market registered a growth of ~45% including Nesher. The total ANDA filings as on today stands at 141. Also the growth has been driven by rupee depreciation. CDL’s consumer business has registered negative growth of ~12% mainly due to increased competition in the skincare segment. The company has taken aggressive steps to arrest the degrowth & is confident of crossing Rs 500mark till FY13. JV’s performance was better on a sequential basis but pressure still exists as Hospira has not launched any products & competition has increased in the existing products.

■ Higher R&D expense & excess contribution from low margin segment dented the EBITDA margins:
Weak EBITDA numbers were a result of higher contribution from low margin segment as well as higher R&D expenses. EBITDA for Q3FY12 stood at Rs 262cr & degrew by ~5.2% q-o-q. Operating margins stood at 18.9% which declined by 304bps & 339bps y-o-y & q-o-q respectively. R&D expense stood at ~6% to the total sales no & is expected to be in the same range in the coming quarters.

 Adjusted PAT at Rs 177cr, a growth of 8.9% y-o-y:
PAT adjusted for forex losses of Rs 32cr for Q3FY12 stood at Rs 177cr, a meagre growth of 8.9% y-o-y. Net profit margins stood at 12.8%, it’s lowest in the last 8 quarters mainly due to higher depreciation & interest expense.

■ Our View & Valuation:
We believe that the company should bottom out in the coming quarter and superior performance could be expected from FY13 onwards. All the past acquisitions should aid in terms of growth. However, we have reduced our earnings estimate mainly on the back of higher expenses in the coming years along with CDL establishing its presence in the low margins segment. We value the company at 20x its FY13 EPS of Rs 42.7 & recommend BUY with a target price of Rs 854, an upside of 27.8% to the current levels.