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Cadila Health.: Margins witness improvement - Views on News from Equitymaster

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Cadila Health.: Margins witness improvement
Aug 8, 2014

Cadila Healthcare has announced its 1QFY15 results. The company has reported 25.7% YoY growth in net sales and an increase of 23.1% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 25.7% YoY during the quarter, led by growth in exports.
  • Operating margins expand by 0.9% YoY to 18.3% for the quarter.
  • Growth in net profits is restricted to 23% YoY due to surge in taxes.
Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 16,075 20,204 25.7%
Other operating income 296 297 0.5%
Expenditure 13,513 16,740 23.9%
Operating profit (EBDITA) 2,858 3,761 31.6%
EBDITA margin (%) 17.5% 18.3%  
Other income 125 104 -16.9%
Interest (net) 278 181 -35.1%
Depreciation 471 677 43.7%
Profit before tax 2,234 3,007 34.6%
Tax 203 524 158.2%
Minority Int/Exceptional exps 80 81 1.3%
Profit after tax/(loss) 1,951 2,402 23.1%
Net profit margin (%) 11.9% 11.7%  
No. of shares (m)   204.7  
Diluted earnings per share (Rs)   46.3  
Price to earnings ratio (x)*   33.7  
*based on trailing 12 months earnings

What has driven performance in 1QFY15?
  • The topline of Cadila Healthcare grew by 25.7% YoY growth during the quarter driven by strong growth in its exports business. Among the various geographies, US demonstrated healthy growth, while growth from India business was tepid.

    Revenue break-up
    (Rs m) 1QFY14 1QFY15 Change
    Domestic
    Formulations 6,252 6,749 7.9%
    API 200 240 20.0%
    Consumer & Others 1,644 1,719 4.6%
    - Consumer products 1,150 1,075 -6.5%
    - Animal health & others 494 644 30.4%
    Total domestic (i) 8,096 8,708 7.6%
    Exports
    Formulations 6,268 9,771 55.9%
    - North America (US) 3,874 7,165 85.0%
    - Europe 927 1,012 9.2%
    - Brazil 519 544 4.8%
    - Japan 122 - -100.0%
    - Emerging markets 826 1,050 27.1%
    APIs 658 767 16.6%
    Animal Health 130 132 1.5%
    JVs 1,310 1,189 -9.2%
    Total exports (ii) 8,366 11,859 41.8%
    Grand Total (i+ii) 16,462 20,567 24.9%

  • Company's domestic formulations segment witnessed modest growth of 7.9% YoY. However, excluding the impact of DPCO and discontinuation of contract from Boehringer Ingelheim, the growth was at 16.6% YoY for the said period. During the quarter, the company had taken increase in prices of some of its drugs. Recently, DPCO brought more drugs under pricing regulations. This will impact company's revenues by approx Rs 250 m per annum. The company expects growth in mid teens for FY15. The company's wellness segment posted negative growth for the quarter. The sales were down by 6.5% YoY for the said period and net profits too were down by 20% YoY for the quarter.

  • The US formulations witnessed robust growth of 85% YoY. Company continued to witness ramp up in its products launched on account of authorized generics (AG) from Abbott and also launched new products in the US. Currently, products like Trilipix, Tricor, Divalproex, Zemplar are marketed as AG. As per the management AGs will be one of the future growth drivers for the US business. One should also note that margins of AGs are lower than the company's overall margins. Cadila continues to make robust filings in the US. The company had filed 50 ANDAs in the US and has made 26 filings in 1QFY15. The company launched 4 new products in the US. Over and above, the company has made one launch from Nesher's portfolio and one more launch is expected in FY15.

  • The other business segments too grew at a decent rate. However, the growth from Japan was nil as the company has shut down the operations and completely exited from this geography. Revenues from JVs were also down by 9.2% YoY. Company remains confident of good traction in JVs in the upcoming period.

  • Operating margins expanded by 0.9% YoY to 18.3% for the quarter. While the margins have shown some improvement, the company expects these to improve further. In the long run, the EBITDA margins are expected to expand to around 20%. It is also imperative to note, the current quarter had lower impact of forex gain, which was included in various line items above EBITDA. Thus the current improvement in margins is commendable. Adjusting for forex gain, the EBITDA margins during the quarter are at 18.1% vs. 15.9% in 1QFY14.

  • Despite the 32% YoY growth in operating profits, bottomline growth was restricted to 23.1% YoY due to the surge in taxes.

Issues in Moraiya facility raised again: It has been around 1 year ago when the company had resolved the issues which were raised by USFDA at the Moraiya facility. But it seems the issues have cropped up once again, as the USFDA has issued some 483s to the company. Fortunately, these 483s are not pertaining to the facility and thus so far its GMP norms or data integrity pertaining to the manufacturing facility has not been questioned. However, the USFDA has raised some doubts on the filings of a couple of ANDAs. While the exact details are still not known, for now these issues do not seem to very serious by nature. However, as the norms have become quite stringent and thus we will have to wait for the final clearance from the USFDA.

What to expect?
At the current price of Rs 1,077, the stock is trading at a multiple of 20.1 times our estimated FY16 earnings. Cadila's growth going forward is highly dependent on the product approvals in various geographies. The company has been quite active in making drug filings and among various geographies; US especially has been an area of focus. The company has been building a niche product pipeline, which include high entry barrier drugs like Transmerdals and Nasal sprays. Hence, the margins and revenues are expected to ramp up going forward. While we are confident of good growth in the upcoming period, we remain cautious on the recent event at Moraiya facility. We thus reiterate Hold rating on 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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