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Cadila Health.: Net profits get a boost - Views on News from Equitymaster

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Cadila Health.: Net profits get a boost
Feb 11, 2014

Cadila Healthcare announced third quarter results of financial year 2013-2014 (3QFY14). The company reported a 17% YoY growth in sales, while net profits grew by 81.5% YoY. Here is our analysis of the results.

Performance summary
  • Topline grows by 17% YoY during the quarter led by growth in exports.
  • Operating margins remain stable at 15.8% as a rise in raw material costs is offset by lower staff costs and other expenditure (all as percentage of sales).
  • Bottomline surges by 81.5% YoY during 3QFY14 due to considerable reduction in both interest costs and tax expenses.

Financial performance: A snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 16,041 18,717 16.7% 47,462 52,555 10.7%
Expenditure 13,528 15,764 16.5% 39,069 44,139 13.0%
Operating profit (EBDITA) 2,513 2,953 17.5% 8,393 8,416 0.3%
EBDITA margin (%) 15.7% 15.8%   17.7% 16.0%  
Other income 123 128 3.8% 283 375 32.7%
Interest (net) 394 190 -51.8% 1,371 662 -51.7%
Depreciation 501 496 -1.1% 1,378 1,485 7.8%
Profit before tax 1,741 2,395 37.6% 5,927 6,645 12.1%
Exceptional item - (35)   - (35)  
Tax 630 408 -35.2% 1,778 713 -59.9%
Minority interest (86) (92)   (236) (254)  
Profit after tax/(loss) 1,024 1,860 81.5% 3,913 5,644 44.2%
Net profit margin (%) 6.4% 9.9%   8.2% 10.7%  
No. of shares (m)       204.7 204.7  
Diluted earnings per share (Rs)         40.6  
Price to earnings ratio (x)*         23.3  
*based on trailing 12 months earnings

What has driven performance in 3QFY14?
  • The topline of Cadila Healthcare registered a healthy 17% YoY growth during the quarter driven by strong growth in exports. The US business recorded an impressive growth of 61% YoY during the quarter. The company filed 31 ANDAs during the quarter. Revenues from Brazil, however, fell by 4% YoY on account of lack of new product approvals as well as pricing pressure witnessed by the base generic business. Sales from Japan were down 19% YoY. It must be noted that the company has decided to exit the Japanese market on account of continuous price reductions and lower generic penetration, all of which has not yielded Cadila much benefit. Europe saw a tepid growth of 6% YoY during the quarter, while Mexico recorded revenues of Rs 49 m.

    Revenue break-up
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Domestic
    Formulations 5,692 5,883 3.4% 17,524 18,398 5.0%
    API 160 112 -30.0% 384 431 12.2%
    Wellness 1,018 1,034 1.6% 3,016 3,223 6.9%
    Animal health & others 500 622 24.4% 1,533 1,692 10.4%
    Total domestic (i) 7,370 7,651 3.8% 22,457 23,744 5.7%
    Exports
    Formulations 6,525 9,167 40.5% 18,285 22,876 25.1%
      - US 3,920 6,316 61.1% 11,186 14,921 33.4%
      - Europe 1,119 1,186 6.0% 2,736 3,056 11.7%
      - Japan 180 145 -19.4% 462 397 -14.1%
      - Brazil 666 639 -4.1% 1,797 1,780 -0.9%
      - Mexico - 49   - 84  
      - Emerging markets & others 640 832 30.0% 2,104 2,638 25.4%
    API 618 731 18.3% 1,856 2,127 14.6%
    Animal health & others 122 163 33.6% 340 427 25.6%
    Total exports (ii) 7,265 10,061 38.5% 20,481 25,430 24.2%
    JVs and Alliances (iii) 1,307 1,012 -22.6% 3,918 3,388 -13.5%
    Grand Total (i+ii+iii) 15,942 18,724 17.5% 46,856 52,562 12.2%

  • The domestic formulations business witnessed a tepid growth of 3% YoY during 3QFY14. The growth was subdued on account of the impact (to the tune of 4%) of the new drug pricing policy as well as the discontinuation of two products. Having said that, the company launched 12 new products during the quarter including line extensions. Zydus Wellness also recorded a subdued growth of 2% YoY during the quarter. While the brand ‘Sugarfree’ has been doing well, the other brands have not. Revenues from this business were also impacted because of a distribution restructuring exercise undertaken by the company. This is expected to yield results going forward.

  • Operating margins remained stable at 15.8% during the quarter. A rise in raw material costs was offset by lower staff costs and other expenditure (all as a percentage of sales). This resulted in a 17.5% YoY growth in operating profits. Growth in the bottomline was robust at 81.5% YoY on account of considerable reduction in both interest costs and tax expenses.
What to expect?

At the current price of Rs 944, the stock is trading at a multiple of 17.2 times our estimated FY16 earnings. Cadila’s growth going forward is highly dependent on product approvals in various geographies. The company has been quite proactive in filings for new drugs especially in the US market. It has built up a lucrative product pipeline and hence revenues are expected to ramp up going forward. Further, there will be no more revenues from Japan in the future as the company has exited that market. Performance of the JVs is also expected to improve going forward. Overall, we recommend that investors Hold on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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