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Cadila Healthcare: Driven by acquisitions - Views on News from Equitymaster
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Cadila Healthcare: Driven by acquisitions
May 2, 2008

Performance summary
  • Topline grows by 27% YoY during the year primarily led by the growth in export formulations and animal health businesses.

  • Operating margins improve marginally by 0.5% due to lower purchase of traded goods (as percentage of sales).

  • While bottomline grows by a considerably slower 9% YoY, if one excludes the extraordinary items, then the bottomline growth stands at 25%.

Financial performance: A snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 4,357 5,632 29.3% 18,288 23,245 27.1%
Expenditure 3,646 4,498 23.4% 14,767 18,647 26.3%
Operating profit (EBDITA) 711 1,134 59.5% 3,521 4,598 30.6%
EBDITA margin (%) 16.3% 20.1%   19.3% 19.8%  
Other income 10 (43)   12 118  
Interest (net) 65 113 73.8% 234 444 89.7%
Depreciation 200 225 12.5% 823 969 17.7%
Profit before tax 456 753 65.1% 2,476 3,303 33.4%
Exceptional items 18 -   263 (69)  
Tax 50 201 302.0% 324 613 89.2%
Profit after tax/(loss) 424 552 30.2% 2,415 2,621 8.5%
Net profit margin (%) 9.7% 9.8%   13.2% 11.3%  
No. of shares (m) 125.6 125.6   125.6 125.6  
Diluted earnings per share (Rs)         20.9  
Price to earnings ratio (x)         11.9  

What has driven performance in FY08?
  • Cadila’s topline for the year registered a robust 27% YoY growth driven by an impressive 72% YoY growth in formulations exports and 131% YoY growth in its animal healthcare business. The triple digit growth in the animal healthcare business was largely acquisition led as the company acquired the remaining 50% stake in the joint venture with Sarabhai. The growth in exports formulations was led by the impressive 80% YoY and 55% YoY growth in the US and French generics business respectively. As far as the US is concerned, the company so far has made 78 ANDA filings out of which 44 are pending approval. The consumer healthcare business (which has brands such as ‘Sugarfree’, ‘Everyuth’ and ‘Nutralite’) also posted a healthy 26% YoY growth during the year.

  • Further, the company concluded the year with an acquisition each in Japan and in Brazil. In Brazil, Cadila acquired the company Nikkho to mark its foray into branded generics in the market. This is expected to spearhead Cadila’s Latin American operations. Nikkho reported sales of Rs 1 bn in FY08 thereby playing its part in spurring Cadila’s exports growth.

  • The JV with Nycomed (initially with Altana, which has now been merged with Nycomed), in which Cadila has a 50% stake, saw its sales and net profits fall by 20% YoY and 28% YoY respectively, as the drug ‘Pantoprazole’ (brand name ‘Protonix’) was subject to generic competition. Thus, to sustain revenues and profitability in the future, Cadila has extended the scope of the JV with Nycomed. As per this, Nycomed will be transferring its current API production from facilities at Linz (Austria) and Singen (Germany) to Zydus Nycomed in India. This would result in manufacture of 18 APIs over the next four years.

    Cost break-up
    (% sales) 4QFY07 4QFY08 FY07 FY08
    Raw material consumption 23.7% 19.4% 20.4% 21.3%
    Purchase of traded goods 11.2% 13.5% 14.5% 12.7%
    Staff cost 13.7% 12.5% 11.5% 11.9%
    Other expenditure 35.0% 34.5% 34.4% 34.3%

  • Operating margins improved marginally by 0.5% during the year largely owing to a fall in purchase of traded goods (as percentage of sales). Besides this, the French business also witnessed an improvement in profitability as the company transferred manufacturing of several products to India. While bottomline growth (up 8.5%) was considerably slower , if one excludes the extraordinary items during both the years, then the growth stood at a much better 25%. Having said that, this was lower than the 31% YoY growth in operating profits due to higher interest costs and tax expenses.

What to expect?
At the current price of Rs 291, the stock is trading at a price to earnings multiple of 10 times our estimated FY10 earnings. Going forward, we expect Cadila's growth to be driven by increasing scale of its US and French generics businesses and a ramp up in the profitability of the French business. Strong performances by the consumer healthcare and contract manufacturing businesses are also expected to contribute to Cadila's overall growth going forward. The patent expiry of the drug 'Protonix' has considerably reduced revenues and profitability from this JV. In a bid to rectify this, Cadila has extended the scope of the JV by undertaking to manufacture 18 APIs over a period of 4 years. Besides this, the JV that it has inked with Hospira, is also expected to enhance revenues and profits going forward. Commercial production from the Hospira JV is expected to commence in FY09. Having said that, ability to sustain the pricing pressure in the global generics market will be the key challenge for Cadila. Overall, we maintain our positive view on the stock.

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