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Cadila Health.: Hit by operating costs & tax - Views on News from Equitymaster

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Cadila Health.: Hit by operating costs & tax
Feb 9, 2013

Cadila Healthcare has announced its 3QFY13 results. The company has reported 16% YoY growth in sales and a 31% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 16% YoY during the quarter led by growth in both the domestic and exports businesses.
  • Operating margins declines by 3.1% during the quarter due to increase in COGS and operating expenses.
  • Bottom line falls by 31% YoY during 3QFY13 due to a surge in tax expenses, by 263% YoY.


Financial performance: A snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 13,832 16,040 16.0% 38,653 47,461 22.8%
Expenditure 11,207 13,491 20.4% 30,643 39,031 27.4%
Operating profit (EBDITA) 2,625 2,549 -2.9% 8,011 8,430 5.2%
EBDITA margin (%) 19.0% 15.9%   20.7% 17.8% 3.0%
Other income 182 171 -6.4% 356 330 -7.1%
Interest (net) 594 478 -19.5% 1,474 1,456 -1.2%
Depreciation 465 496 6.6% 1,188 1,363 14.7%
Profit before tax 1,748 1,746 -0.1% 5,705 5,941 4.2%
Tax 174 630 263.1% 694 1,778 156.1%
Minority Int 74 86 17.3% 193 236 22.1%
Profit after tax/(loss) 1,501 1,030 -31.4% 4,817 3,928 -18.5%
Net profit margin (%) 10.9% 6.4%   12.5% 8.3%  
No. of shares (m)         205  
Diluted earnings per share (Rs)         27.5  
Price to earnings ratio (x)*         26.4  
*based on trailing 12 months earnings

What has driven performance in 3QFY13?
  • The topline of Cadila Healthcare registered a decent 16% YoY growth during the quarter driven by strong growth in its domestic and exports businesses.

    Revenue break-up
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Domestic            
    Formulations 4,693 5,699 21.4% 13,967 17,534 25.5%
    API 157 160 1.9% 291 384 32.0%
    Consumer & Others 1,208 1,518 25.7% 3,846 4,549 18.3%
    - Consumer products 796 1,018 27.9% 2,588 3,016 16.5%
    - Animal health & others 412 500 21.4% 1,258 1,533 21.9%
    Total domestic (i) 6,058 7,377 21.8% 18,104 22,467 24.1%
    Exports            
    Formulations 5,783 6,562 13.5% 14,812 18,334 23.8%
    - North America (US) 3,435 3,920 14.1% 8,898 11,186 25.7%
    - Europe 889 1,119 25.9% 2,277 2,736 20.2%
    - Brazil 792 666 -15.9% 1,917 1,797 -6.3%
    - Japan 154 180 16.9% 386 462 19.7%
    - Emerging markets 513 677 32.0% 1,334 2,153 61.4%
    APIs 577 618 7.1% 1,820 1,856 2.0%
    Animal Health 107 122 14.0% 191 340 100.0%
    JVs 1,212 1,263 4.2% 3,088 3,858 24.9%
    Total exports (ii) 7,679 8,565 11.5% 19,911 24,388 22.5%
    Grand Total (i+ii) 13,737 15,942 16.1% 38,015 46,855 23.3%

  • The domestic formulations business witnessed a robust growth of 21% YoY during 3QFY13. Excluding the Biochem acquisition, growth was at 18% YoY. This was led by existing products and the launch of 15 new products including line extensions. Among the new launches, 4 products were launched for the first time in India. Zydus Wellness recorded a robust growth of 28% YoY during the quarter. This business had been facing rough weather over the past few quarters on account of competition. However better growth was witnessed during the quarter. The company's newly launched product Activ lite is still growing at a slower pace. The company intends to launch Nutralite with “Omega 3” in the upcoming period. The domestic Animal Health business grew by 21% YoY during 3QFY13. The company launched four new products in this segment in India.

  • The US business recorded an unexciting growth of 14% YoY during the quarter. The company filed 18 new ANDAs including one for injectable drugs and for the first time made filings in the derma segment by making 2 filings for topicals. The company is looking to file for injectables and Transmerdals segment in the US. Cadila also launched one product viz Oxycodone from Nesher's portfolio in Dec 2012. The revenues from this product will ramp up in the upcoming period. For CY13, company targets to launch a total 4 products from Nesher's portfolio of which 3 will be for controlled release substance. The company has a total of 90 ANDAs pending for approval of which 55 ANDAs are in oral substance. The company is awaiting US FDA approval for its transmerdal facility in next couple of months. Europe witnessed growth of 25% on the back of 3 new product launches in France and 10 new launches in Spain. Brazil revenues declined 16% due to impact of ANVISA strike during 2QFY13; company expects growth to come back on track in the coming quarters. Revenues from emerging markets grew by 32% YoY, due to new product launches. Over and above, the acquired business of Bremer's for animal health grew by 14% YoY.

  • JVs witnessed weak growth of 4% YoY for the quarter. Large part of sales was impacted due to lower contribution from Hospira JV, due to increasing competition in docetaxel injectables. In the future, the JV segment will grow on the back of commercial supply of products from Abbott deal, API supply for 14 products in Nycomed JV, and new oncology products supply from Hospira JV.

  • Gross margins declined by 0.9% due to lower realization of sales from US and Brazil and forex. Further Biochem, which has lower margins than Cadila, is also hurting the overall margins of the company. The overall operating expenses also increased on the back of donations and ANDA filing related expenses incurred by the company to the extent of Rs 550 m. Of which Rs 100-120 m was spent towards filings with USFDA. The overall EBITDA margins also declined by approx 3.1%.

  • Bottomline fell by 31% YoY during 3QFY13 due to a surge tax expenses. For the current quarter tax rate was at 36%, for the upcoming period company has guided for the tax rate of 25-30%.

    Financial Highlights -

    • Debt - As on date company has debt of Rs 23 bn of which 23 m was raised during the quarter
    • Capex - Company targets to incur capex of Rs 6.5 bn for FY13 and FY 14
    • Hedging - Company has kept its forex position open for the upcoming period

What to expect?
At the current price of Rs 791, the stock is trading at a multiple of 14 times our estimated FY15 earnings. Cadila's growth going forward will be driven by increasing scale of its US business and maintaining healthy growth in the domestic market. The JVs are also expected to contribute to overall growth. After receiving clearance from USFDA's warning letter, company expects to make quality launches like injectables and Transmerdals in the upcoming period. We remain cautious on the impact of pricing policy on the company's domestic business and margins due to unexpected operating costs. Overall, while the topline growth of the company looks good, rising operating costs and taxes is expected to be a cause for concern. Overall, we recommend investors to Hold on to the stock.

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