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Cadila Healthcare: On a strong footing - Views on News from Equitymaster
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Cadila Healthcare: On a strong footing
Jan 28, 2010

Performance summary
  • Topline grows by 32% YoY during the quarter primarily led by growth both in the domestic as well as the export business.
  • Operating margins improve by 2.2% led by a substantial fall in raw material and staff costs (as percentage of sales).
  • Bottomline grows by 125% YoY during 3QFY10, and is bolstered by the strong performance at the operating level, lower interest costs and forex gains.


Financial performance: A snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 7,491 9,910 32.3% 22,041 28,403 28.9%
Expenditure 6,067 7,810 28.7% 17,475 22,210 27.1%
Operating profit (EBDITA) 1,424 2,099 47.4% 4,566 6,193 35.6%
EBDITA margin (%) 19.0% 21.2%   20.7% 21.8%  
Other income 117 25 -79.0% 160 108 -32.7%
Interest (net) 250 217 -13.4% 538 652 21.2%
Depreciation 299 334 11.4% 804 941 17.0%
Profit before tax 992 1,574 58.7% 3,385 4,708 39.1%
Exceptional items - (11)   (18) (46)  
Forex loss/(gain) 111 (38) -134.6% 356 1 -99.7%
Tax 284 255 -10.1% 508 673 32.6%
Profit after tax/(loss) 597 1,346 125.3% 2,503 3,988 59.3%
Net profit margin (%) 8.0% 13.6%   11.4% 14.0%  
No. of shares (m)       125.6 136.5  
Diluted earnings per share (Rs)         33.1  
Price to earnings ratio (x)         20.9  

What has driven performance in 3QFY10?
  • Cadila’s topline for the quarter registered a robust 32% YoY growth driven by strong growth in both in the domestic and the exports business. The global formulations business clocked a robust 45% YoY growth and was buoyed by the dazzling 67% YoY growth in the US business. Most of the products are in the injectibles space, which is a niche therapeutic area with relatively lesser competition and price erosion. The European, Latin American and Japanese businesses also did well during the quarter. Revenues from the Nycomed JV declined by 14% YoY during the quarter and could be attributed to generic competition. However, Cadila’s JV with Hospira to manufacture oncology injectibles, which began commercial operations in May 2009, posted sales of Rs 186 m during this quarter. API exports clocked an impressive 33% YoY growth during the quarter as supply of products to generic companies scaled up.
    Revenue break-up
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Domestic            
    Formulations 3,108 3,640 17.1% 9,971 11,294 13.3%
    API 90 78 -13.3% 352 247 -29.8%
    Consumer & Others 820 1,074 31.0% 2,412 3,021 25.2%
    - Consumer products 530 751 41.7% 1,502 2,041 35.9%
    - Animal health & others 290 323 11.4% 910 980 7.7%
    Total domestic (i) 4,018 4,792 19.3% 12,735 14,562 14.3%
    Exports            
    Formulations 2,865 4,160 45.2% 7,056 10,685 51.4%
    - North America (US) 1,065 1,779 67.0% 2,682 4,861 81.2%
    - Europe 788 1,037 31.6% 1,710 2,203 28.8%
    - Latin America 472 568 20.3% 1,297 1,394 7.5%
    - Japan 68 88 29.4% 132 244 84.8%
    - Emerging markets 472 502 6.4% 1,235 1,360 10.1%
    - Zydus Hospira (50%) - 186   - 623  
    APIs 622 785 26.2% 2,277 2,635 15.7%
    - Zydus Nycomed (50%) 84 72 -14.3% 680 575 -15.4%
    - Others 538 713 32.5% 1,597 2,060 29.0%
    Total exports (ii) 3,487 4,945 41.8% 9,333 13,320 42.7%
    Grand Total (i+ii) 7,505 9,737 29.7% 22,068 27,882 26.3%

  • The consumer healthcare business posted a healthy 31% YoY growth during the quarter while the domestic formulations business witnessed a growth of 17% YoY. This was led by the existing products and the launch of 24 new products including line extensions during the quarter.

  • Operating margins remained improved by 2.2% during the quarter due to a substantial fall in raw material and staff costs (as percentage of sales). Thus operating profits registered a growth of 47% YoY during the quarter. Led by the strong performance at the operating level, the bottomline grew by 125% YoY. What also contributed to the growth in net profits were forex gains of Rs 38 m during this quarter as compared to a forex loss of Rs 111 m in the corresponding quarter last year. Thus, on excluding this impact, the growth in net profits was still strong at 85% YoY due to lower interest costs and tax expenses.

What to expect?
At the current price of Rs 691, the stock is trading at a multiple of 14.3 times our estimated FY12 earnings. Going forward, we expect Cadila's growth to be driven by increasing scale of its US and other export formulation businesses. Further, strong performances by the consumer healthcare and custom manufacturing businesses and the JV with Hospira are also expected to contribute to Cadila's overall growth going forward.

However, pricing pressure in the global generics market and volatile foreign currency movements are the key challenges that Cadila faces. While we are positive about the growth prospects of the company from a long term perspective, current valuations do not leave much on the table for investors.

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