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Cadila: Sales grows; margins dip - Views on News from Equitymaster

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Cadila: Sales grows; margins dip
Mar 9, 2012

Cadila Healthcare has announced its third quarter results for 2012 (3QFY12). The company has reported 18.5% YoY growth in sales and 7.9% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 18.5% YoY led by export revenues and supply to the JVs.
  • Operating margins (EBITDA) decrease by 3.1% due to increase in employee costs.
  • Net profits fall by 7.9% YoY mainly due to poor performance at the operating level and higher finance charges.

Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 11,668 13,832 18.5% 34,173 38,653 13.1%
Expenditure 9,106 11,216 23.2% 26,189 30,643 17.0%
Operating profit (EBIDTA) 2,562 2,616 2.1% 7,984 8,011 0.3%
EBDITA margin (%) 22.0% 18.9%   23.4% 20.7%  
Other income 29 182 519.7% 97 356 268.2%
Depreciation 334 465 39.6% 952 1,188 24.8%
Financial Charges / (Income) 194 594 206.6% 670 1,474 120.1%
Profit before tax 2,064 1,739 -15.7% 6,459 5,705 -11.7%
Tax 368 174 -52.8% 960 694 -27.7%
Exceptional Gain / (Loss) - -   - -  
Forex Gain / (Loss) - -   - -  
Minority Interest (76) (74)   (179) (193)  
Profit after tax/(loss) 1,620 1,492 -7.9% 5,320 4,817 -9.5%
Net profit margin (%) 14% 11%   16% 12%  
No. of shares (m) 205 205   205 205  
Diluted earnings per share (Rs) 8 7   26 24  
Price to earnings ratio (x)*   21.6        
* On a trailing 12 month basis

What has driven performance in 3QFY12?
  • Cadila's net sales registered an 18.5% YoY growth driven by export revenues and supply to the JVs. The exports grew 20.4% YoY to Rs 6.4 bn and the supply to JVs increased by 57.8% YoY. However, the domestic revenues growth was lower at 13.6% YoY. The growth was partially helped by acquisition of Nesher Pharma in the US and Bremer Pharma in India. Excluding the acquisitions, the company's sales grew by14% YoY. The rupee depreciation against the US dollar also added to the growth.

    Revenue break-up
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Domestic 5,332 6,058 13.6% 16,522 18,104 9.6%
    Formulations 3,987 4,693 17.7% 12,597 13,967 10.9%
    APIs 75 157 109.3% 231 291 26.0%
    Wellness 908 796 -12.3% 2,581 2,589 0.3%
    Animal Health & Others 362 412 13.8% 1,113 1,257 12.9%
    Exports 5,371 6,467 20.4% 14,889 16,823 13.0%
    Formulations 4,608 5,783 25.5% 12,423 14,812 19.2%
    US 2,367 3,435 45.1% 6,852 8,898 29.9%
    Europe 880 889 1.0% 2,100 2,277 8.4%
    Japan 107 154 43.9% 292 386 32.2%
    Brazil 755 792 4.9% 1,726 1,917 11.1%
    Emerging Markets 499 513 2.8% 1,453 1,334 -8.2%
    APIs 763 577 -24.4% 2,466 1,820 -26.2%
    Animal Health & Others - 107   - 191  
    JVs 768 1,212 57.8% 1,955 3,088 57.9%
    Total 11,471 13,737 19.8% 33,366 38,015 13.9%

  • After two consecutive bad quarters on the domestic front, the current quarter was comparatively better for the domestic formulations business which grew by 17% YoY (15% organic growth). However, the consumer business has been a big disappointment for the last three quarters. The consumer business de-grew by 12.3% YoY due to intense competition in skin care and slowdown in the artificial sweetner (SugarFree) category. The animal health business showed a modest growth of 13.8% YoY

  • The US formulation sales grew by 45.1% YoY but the organic growth (ex-Nesher) was 27% YoY. This was despite the favorable benefit from the currency movement. Sales from the joint ventures (JVs) grew by 58% YoY driven by one-time supplies to Nycomed of Rs 150 m. This was complemented by the Bayer JV contribution, while the Hospira JV posted flat growth. The sales from the Abbott JV will commence from FY13.

  • Operating margins (EBITDA) decreased by 310 bps (3.1%) mainly on account of very low margins in Nesher and Biochem (new acquisition) and higher R&D expenses for the quarter. Net profits fell by 7.9% YoY due to reduction in operating margins and increase in financial charges which nearly doubled over last year. Cadila has plans to launch 2-3 products through Nesher by FY13. Nesher has 1 product in the market, which gives revenues of US$ 5 m per quarter. The company expects an FDA inspection of its injectable facility this month, and they expect to get 4-5 new ANDA approvals if the inspection goes fine

What to expect?
At the current price of Rs 698, the stock is trading at a multiple of 13.6 times our estimated FY14 earnings. The domestic and the US market had muted growth for this quarter. However, Cadila's growth going forward will be driven by increasing scale of its US business and maintaining decent growth in the domestic market. After two bad quarters, this quarter saw some revival in domestic formulations but the consumer business did not do to well for the third consecutive quarter. The JVs have shown phenomenal growth and are expected to contribute to Cadila's overall growth going forward.

However, pricing pressure in the global generics market and slowdown in domestic growth are key challenges for Cadila. After a couple of acquisitions by Cadila, the margins have dipped. However the synergy benefits should start flowing after a couple of quarters and the margins should improve again. Overall, we are positive on the stock from a long term perspective.

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