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Cadila Health.: Higher taxes dent bottomline - Views on News from Equitymaster

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Cadila Health.: Higher taxes dent bottomline

May 23, 2014

Cadila Healthcare has announced its 4QFY14 results. The company has reported 22.4% YoY growth in net sales and a decline of 8.8% in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 22.4% YoY during the quarter, led by growth in exports (largely the US) and the domestic business.
  • Operating margins expand by 0.5% YoY to 18.2% for the quarter. The core EBITDA margins (excluding operating income) are at 16% (up by 0.7% YoY). Margin expansion is poor despite three Authorized generic launches and lower R&D costs.
  • Bottomline declines by 8.8% YoY largely on account of higher taxes and exceptional loss of Rs 137 m.

(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 15,656 19,163 22.4% 61,553 70,601 14.7%
Other operating income 460 522 13.4% 2,025 1,639 -19.1%
Expenditure 13,258 16,100 21.4% 52,328 60,239 15.1%
Operating profit (EBDITA) 2,858 3,586 25.5% 11,250 12,001 6.7%
EBDITA margin (%) 17.7% 18.2%   17.7% 16.6%  
Other income 87 131 50.4% 370 507 36.9%
Interest (net) 316 240 -23.9% 1,687 902 -46.5%
Depreciation 470 528 12.4% 1,847 2,012 8.9%
Profit before tax 2,160 2,949 36.5% 8,086 9,593 18.6%
Tax (590) 348   1,187 1,060 -10.7%
Exceptional loss - 137   - 172  
Minority Int 128 72 -43.7% 364 326 -10.4%
Profit after tax/(loss) 2,621 2,392 -8.8% 6,535 8,035 23.0%
Net profit margin (%) 16.3% 12.2%   10.6% 11.4%  
No. of shares (m)         204.7  
Diluted earnings per share (Rs)         39.3  
Price to earnings ratio (x)*         23.8  
*based on trailing 12 months earnings

What has driven performance in 4QFY14?
  • The topline of Cadila Healthcare grew by 22.4% YoY during the quarter driven by strong growth in exports as well as the domestic busienss. Among the various geographies, US displayed healthy growth. Even the India witnessed good growth inspite of issues in the domestic market.

    Revenue break-up
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Formulations 5,708 6,247 9.4% 23,231 24,644 6.1%
    API 138 209 51.4% 522 640 22.6%
    Consumer & Others 1,565 1,680 7.3% 6,114 6,596 7.9%
    - Consumer products 1,084 1,073 -1.0% 4,100 4,296 4.8%
    - Animal health & others 481 607 26.2% 2,014 2,300 14.2%
    Total domestic (i) 7,411 8,136 9.8% 29,867 31,880 6.7%
    Formulations 6,600 9,403 42.5% 24,886 32,282 29.7%
    - North America (US) 3,882 6,783 74.7% 15,068 21,704 44.0%
    - Europe 961 845 -12.1% 3,697 3,902 5.5%
    - Brazil 586 573 -2.2% 2,384 2,353 -1.3%
    - Japan 141 144 2.1% 603 541 -10.3%
    - Emerging markets 1,030 1,058 2.7% 3,134 3,782 20.7%
    APIs 721 731 1.4% 2,577 2,857 10.9%
    Animal Health 108 138 27.8% 448 565 100.0%
    JVs 1,153 1,111 -3.6% 5,071 4,499 -11.3%
    Total exports (ii) 8,582 11,383 32.6% 32,982 40,203 21.9%
    Grand Total (i+ii) 15,993 19,519 22.0% 62,849 72,083 14.7%

  • Cadila's domestic formulations segment witnessed good growth of 9.4% YoY, despite the expiry of the Boehringer contract and the challenges in the domestic market. The new pricing policy has impacted growth of various pharma companies. On the positive side, the companies are allowed to increase the price of the drugs under NLEM list by 6.7%. Cadila will also be increasing price of the domestic drugs (Non-NLEM) drugs by 10%. This will help in better sales growth for the upcoming period. Further, the ongoing issues in trade channels have also been resolved. The company expects growth of 13%+ for FY15. During the year FY14, Cadila launched 75 new products of which 19 were launched for the first time in India. Company's wellness segment declined by 1% YoY during the quarter. Cadila continued to maintain leadership in Sugar Free brand, where it has a market share of 93%. However, the company's Everyuth segment, especially the facewash category, is witnessing stiff competition.

  • After a long time the company posted healthy growth of 74.7% YoY in its US formulations segment. This was due to launch of 3 authorized generic products viz., Depakote ER, Trilipix and Tricor. The patented market size of these drugs is approximately US$ 2.3 bn. However, as generics have been launched since some time for all the three drugs, we believe the market erosion must have taken place extensively, till the time Cadila launched its authorized generics (AG). Company is aiming to make such AG launches especially from Abbott's branded basket. Cadila has also made 50 ANDA filings during the year, taking its total ANDA filings to 227 of which it already has approval for 91 products. The company will continue to focus on niche launches and intends to make 15-20 launches per annum. As far as Para IV launches are concerned, it expects to launch Asacol and Lialda in the US and a possible launch of Niacin AG could also be on the cards.

  • JVs witnessed decline in growth by 3.6% YoY for the quarter. The company has also commenced supply of products through its Abbott JV. It has supplied 4 drugs so far. The Hospira JV facility has got approval from Korean and Japan regulatory authorities. Going forward, Cadila expects better traction in the JV sales.

  • Operating margins expanded by 0.5% YoY to 18.2% for the quarter. The core EBITDA margins (excluding operating income) were at 16% up by 0.7% YoY. Margin expansion was poor despite three Authorized generic launches and lower R&D costs (down by 18% YoY). However, going forward the management expects R&D expenses to increase. One should note, by nature, authorized generics have better margins. Further, the company expects margins to improve by 3% from the current levels by FY16. This is inspite of increase in R&D costs, which have been pegged at 6-7% of sales.

  • The bottomline declined by 8.8% YoY on account of higher taxes and exceptional loss of Rs 137m. Even after excluding the latter, the profits were still down by 3.5% YoY. One should note that the company had benefitted from a tax credit availed in 4QFY13 which was not there this quarter. But at the PBT level, the profits were up by a healthy 36.5% YoY, helped by a strong growth in operating profits, higher other income and decrease in interest costs.
What to expect?
At the current price of Rs 935, the stock is trading at a multiple of 19.3 times our estimated FY16 earnings. Cadila's growth going forward will be highly dependent on product approvals in various geographies. The company has been quite proactive in filings for new drugs. The US has been an area of focus. The company has built up lucrative product pipeline and hence revenues and margins are expected to ramp up going forward. Cadila has given guidance of Rs 100 bn of revenues by FY16 with improvement in EBITDA margins by 3% from the current levels.

The company has been facing challenges on various fronts in the past few quarters. However, the management sounds confident about future growth now. While we expect the company to report good growth in the upcoming period, we remain cautious with respect to the huge improvement in margins indicated by the management given that R&D expenses are expected to rise. We have closed our position on Cadila Healthcare on 19 May 2014. However, investors who have invested in the stock can Hold on to the same.

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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