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Cadila Healthcare: The exports kicker - Views on News from Equitymaster

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Cadila Healthcare: The exports kicker
Oct 24, 2008

Performance summary
  • Topline grows by 22% YoY during the year primarily led by the growth in exports to emerging markets, US and France.
  • Operating margins reduce by 1% due to increase in purchase of traded goods and other expenditure (as percentage of sales).
  • While bottomline grows by 14% YoY, if one excludes the gains and losses from forex fluctuations during both the periods, then the bottomline growth stands at a much higher 30% YoY duly aided by the reduction in interest costs.


Financial performance: A snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 6,097 7,409 21.5% 11,818 14,550 23.1%
Expenditure 4,779 5,884 23.1% 9,390 11,408 21.5%
Operating profit (EBDITA) 1,317 1,525 15.8% 2,429 3,142 29.4%
EBDITA margin (%) 21.6% 20.6%   20.5% 21.6%  
Other income 0 1   3 3 3.0%
Interest (net) 137 99 -27.4% 210 248 18.1%
Depreciation 235 259 10.1% 474 505 6.5%
Profit before tax 945 1,167 23.5% 1,748 2,393 36.9%
Exceptional items (24) (18)   (24) (18)  
Forex loss/(gain) (10) 114   (101) 245  
Tax 114 101 -11.2% 235 224 -4.6%
Profit after tax/(loss) 818 935 14.3% 1,591 1,906 19.8%
Net profit margin (%) 13.4% 12.6%   13.5% 13.1%  
No. of shares (m)       125.6 125.6  
Diluted earnings per share (Rs)         15.9  
Price to earnings ratio (x)         16.3  

What has driven performance in 2QFY09?
  • Cadila’s topline for the quarter registered a robust 22% YoY growth driven by growth in exports to emerging markets, US and France. While revenues from the emerging markets recorded a splendid 100% YoY growth, US and France posted strong growth rates of 28% YoY and 27% YoY respectively. As far as the US is concerned, the company received approvals for 2 products and filed 3 ANDAs during the quarter taking the total number of ANDA filings to 79 out of which 41 have been approved so far. The consumer healthcare business (which has brands such as 'Sugarfree', 'Everyuth' and 'Nutralite') also posted a healthy 51% YoY growth during the quarter. The company plans to list the consumer business as a separate company and is awaiting approval from the courts. Revenues from Brazil grew by 23% YoY.

  • The JV with Nycomed (initially with Altana, which has now been merged with Nycomed), in which Cadila has a 50% stake, saw its sales double during the quarter. Given that the drug ‘Pantoprazole’ (brand name ‘Protonix’) has been subject to generic competition, 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.

  • Operating margins improved declined by 1% during the quarter largely owing to a rise in purchase of traded goods and other expenditure (as percentage of sales). While bottomline (up 14% YoY) grew in tandem with the growth in operating profits, it was nevertheless restricted by the forex losses incurred by the company during the quarter as against a gain in the corresponding quarter last year. Thus, if one excludes this impact during both the periods, then the growth stood at a much better 30% YoY duly aided by the reduction in interest costs.

What to expect?
At the current price of Rs 259, the stock is trading at a price to earnings multiple of 7.2 times our estimated FY11 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 the fourth quarter of 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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