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Cadila: Margins under pressure

Mar 22, 2002

The third quarter results of Cadila Healthcare show a sharp improvement in topline growth. As against a 7% growth in the first half of the current year, the company has logged a growth rate of almost 30% in the third quarter. However, the drop in operating margins is somewhat disappointing. The company however, seems to be on the fast track on its way up through the inorganic route.

(Rs m) 3QFY01 3QFY02 Change
Sales 1,171 1,518 29.7%
Other Income 3 4 73.6%
Expenditure 960 1,283 33.6%
Operating Profit (EBDIT) 210 236 12.0%
Operating Profit Margin (%) 18.0% 15.5% -13.6%
Interest Exp/ (Income) (23) 19
Depreciation 44 53 20.2%
Profit before Tax 192 169 -12.1%
Tax 17.5 22 24.4%
Profit after Tax/(Loss) 175 147 -15.7%
Net profit margin (%) 14.9% 9.7%  
No. of Shares (eoy) (m) 60 60  
Diluted Earnings per share* 11.7 9.8  
P/E (at current price) 12.8  
(*- annualised)      

The strong growth rate has been possible due to launch of new products in the neuroscience division, acquisition of perpetual rights to market five leading brands from Asta and acquisition of 'Aten' brand from Kopran last year. Further the company has also logged several co-marketing alliances with Kopran, Ranbaxy and E-Merck. However, margins in this business are low compared to other businesses which partially explains the drop in overall margins.

The company has ambitious plans to emerge amongst the top 3 pharmaceutical companies in India by March 2004. To achieve the same, the company has invested heavily in creating large scale capacities which would help it sustain growth momentum in coming times. Realising its over dependence on few slow growing therapeutic segments, the company has made some rapid moves, including acquisitions, which will strongly position the company in some of the fast growing therapeutic segments.

Though domestic growth is likely to be low in current year, the growth would pick up from next year, once the additional manufacturing capacity goes on stream. Further, the merged numbers with German Remedies would show a robust picture of the company. The research initiatives of the company are also capable of giving surprises going forward.

However, what is concerning is the rising interest burden on the company. The debt amount of the company has rose considerably in last one year to fund its acqusitions and research initiatives. The payback period of these acquisitions would have to justify the rise in interest costs. The valuations of the company going forward would thus depend on how fast the debt backed acquisitions of the company payoff. At the current market price of Rs 125, the stock trades at 12x its third quarter annualised earnings.


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