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Cadila Healthcare: Buoyed by the US - Views on News from Equitymaster
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Cadila Healthcare: Buoyed by the US
Oct 28, 2009

Performance summary
  • Topline grows by 28% YoY during the quarter primarily led by the growth in US generics business and also due to strong API exports.
  • Operating margins improve by 1.1% led by a fall in staff costs and other expenditure (as percentage of sales).
  • Bottomline grows by 45% YoY during 2QFY10, and is bolstered by the strong performance at the operating level, higher other income and lower forex losses.


Financial performance: A snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 7,409 9,458 27.6% 14,550 18,493 27.1%
Expenditure 5,884 7,401 25.8% 11,408 14,399 26.2%
Operating profit(EBDITA) 1,525 2,057 34.9% 3,142 4,094 30.3%
EBDITA margin (%) 20.6% 21.7%   21.6% 22.1%  
Other income 27 41 51.1% 43 83 91.9%
Interest (net) 126 206 63.2% 288 434.9 51.3%
Depreciation 259 311 20.2% 505 607 20.3%
Profit before tax 1,167 1,581 35.4% 2,393 3,135 31.0%
Exceptional items (18) (26)   (18) (35)  
Forex loss/(gain) 114 25 -77.7% 245 39 -83.9%
Tax 101 176 74.2% 224 418 86.5%
Profit after tax/(loss) 935 1,354 44.9% 1,906 2,642 38.7%
Net profit margin (%) 12.6% 14.3%   13.1% 14.3%  
No. of shares (m)       125.6 136.5  
Diluted earnings per share (Rs)         27.6  
Price to earnings ratio (x)         20.1  

What has driven performance in 2QFY10?
  • Cadila’s topline for the quarter registered a robust 28% YoY growth driven by growth in exports to emerging markets, US, and also from API exports. The global formulations business clocked a robust 46% YoY growth and was buoyed by the dazzling 101% YoY growth in the US business. The company received approvals for 2 ANDAs during the quarter taking the total number of US ANDA approvals to 50. Most of the products are in the injectibles space, which is a niche therapeutic area with relatively lesser competition and price erosion. In Europe, the French business did not do too well and reported a growth of 5% YoY. This was due to two reasons. First there were supply constraints with respect to a key product and the second were lesser product launches as compared to the corresponding quarter last year. Further, in order to compensate for the likely decline in revenues from the Nycomed JV, Cadila had formed another JV with Hospira to manufacture oncology injectibles. This JV began commercial operations in May 2009 and posted sales of Rs 200 m during this quarter. API exports clocked an impressive 44% YoY growth during the quarter as supply of products to generic companies scaled up.

  • The consumer healthcare business posted a healthy 37% YoY growth during the quarter while the domestic formulations business witnessed a growth of 10% YoY. This was led by the existing products and the launch of 14 new products including line extensions during the quarter.

  • Operating margins remained improved by 1.1% during the quarter due to a fall in staff costs and other expenditure (as percentage of sales). The company managed to keep its raw material costs under control. Thus operating profits registered a growth of 35% YoY during the quarter. Led by the strong performance at the operating level, the bottomline grew by 45% YoY. Having said that, what also contributed to the growth in net profits were lower forex losses during this quarter (Rs 25 m) as compared to the corresponding quarter (Rs 114 m) last year. Thus, on excluding this impact, the growth in net profits was 32% YoY, which was slightly lower than the growth in operating profits due to higher interest costs and tax expenses.

What to expect?
At the current price of Rs 555, the stock is trading at a multiple of 9.5 times our estimated FY12 earnings. Going forward, we expect Cadila's growth to be driven by increasing scale of its US and French generics businesses. Further, strong performances by the consumer healthcare and custom manufacturing businesses are also expected to contribute to Cadila's overall growth going forward.

In a bid to bolster sales from the Nycomed JV, 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, which started commercial operations during 1QFY10, is also expected to enhance revenues and profits going forward. However, pricing pressure in the global generics market, volatile foreign currency movements and any inability on the part of Cadila to grow its profits after the patent expiry of ‘Pantoprazole’ are the key challenges that Cadila faces. Overall, we maintain our positive view on the stock.

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