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Cadila Health.: Lower taxes boost profits
Oct 31, 2013

Cadila Healthcare has announced its 2QFY14 results. The company has reported 12.3% YoY growth in sales and robust growth of 93.7% in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 12.3% YoY during the quarter, led by growth in exports for both the formulations and API segment. Domestic segment witnesses muted growth.
  • Operating margins remain flat at 14.9% for the quarter. Operating profits grow by 13% YoY.
  • Bottom line jumps sharply by 93.4% YoY largely due to sharp decline in tax expenses and lower finance costs.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 15,125 16,983 12.3% 30,286 33,057 9.1%
Other operating income 351 485 38.0% 1,134 781 -31.2%
Expenditure 13,171 14,863 12.8% 25,541 28,375 11.1%
Operating profit (EBDITA) 2,305 2,605 13.0% 5,880 5,463 -7.1%
EBDITA margin (%) 14.9% 14.9%   18.7% 16.1%  
Other income 65 122 89.3% 160 248 55.0%
Interest (net) 405 193 -52.3% 977 472 -51.7%
Depreciation 436 518 18.7% 870 983 13.0%
Profit before tax 1,529 2,016 31.9% 4,192 4,256 1.5%
Tax 494 101 -79.5% 1,148 304 -73.5%
Minority Int 88 81 -8.4% 150 161  
Profit after tax/(loss) 947 1,834 93.7% 2,895 3,791 30.9%
Net profit margin (%) 6.1% 10.5%   9.6% 11.2%  
No. of shares (m)         205  
Diluted earnings per share (Rs)         36  
Price to earnings ratio (x)*         18  
*based on trailing 12 months earnings

What has driven performance in 2QFY14?
  • The topline of Cadila Healthcare grew by 12.3% YoY growth during the quarter driven by strong growth in its export formulations and API segments.

    Revenue break-up
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Domestic
    Formulations 6,018 6,263 4.1% 11,836 12,515 5.7%
    API 116 119 2.6% 224 319 42.4%
    Consumer & Others 1,503 1,615 7.5% 3,031 3,259 7.5%
    - Consumer products 965 1,039 7.7% 1,998 2,189 9.6%
    - Animal health & others 538 576 7.1% 1,033 1,070 3.6%
    Total domestic (i) 7,637 7,997 4.7% 15,091 16,093 6.6%
    Exports
    Formulations 5,820 7,438 27.8% 11,772 13,706 16.4%
    - North America (US) 3,674 4,730 28.7% 7,266 8,604 18.4%
    - Europe 762 942 23.6% 1,617 1,869 15.6%
    - Brazil 487 622 27.7% 1,131 1,141 0.9%
    - Japan 143 131 -8.4% 282 253 -10.3%
    - Emerging markets 754 1,013 34.4% 1,476 1,839 24.6%
    APIs 588 738 25.5% 1,238 1,396 12.8%
    Animal Health 102 134 31.4% 218 264 100.0%
    JVs 1,300 1,068 -17.8% 2,595 2,378 -8.4%
    Total exports (ii) 7,810 9,378 20.1% 15,823 17,744 12.1%
    Grand Total (i+ii) 15,447 17,375 12.5% 30,914 33,837 9.5%

  • The domestic formulations business witnessed muted growth of 4.1% YoY during 2QFY14. This was due to disruptions caused by stockists on the back of implementation of the new pricing policy. For the full year, the company expects overall sales in the domestic segment to get impacted by Rs 700-750 m per annum on account of the pricing policy. The company expects growth to be in single digits for remaining part of the year. Cadila had launched 19 new products of which 4 were launched for the first time in India. The company also launched Lipaglyn indicated for treating diabetic dyslipidemia. The company has so far earned Rs 60 lakhs from this drug and has currently 2,500 patients on this product. Zydus Wellness recorded 7.7% YoY growth during the quarter. This was largely due to muted growth in its major brands. Only Sugar Free witnessed better growth of 24% YoY for the quarter. Company is in the process of putting in place various strategies like line extensions etc. in order to fuel future growth in this segment. The animal health segment grew by 7.1% YoY. Company has launched 3 new products in this segment during the quarter.

  • The US business sales ramped up and witnessed healthy growth of 28.7% YoY during the quarter. This was due to launch of new products and price hikes taken in some products. Cadila launched two new products in the US market as well as Depakote ER generics, an important launch by the company. Some time back this product had been witnessing supply shortages. During the quarter 12 new drugs filings were made of which 2 are injectables. The company expects to receive 20 new approvals in next 12-15 months. One of the low competition products, Toprol, is also expected to get approval probably by the next fiscal. Cadila intends to file total of 30 products during FY14. Europe too grew by 23.6% YoY on the back of new launches and better growth in France and Spain. Brazil also witnessed good growth of 27.7% YoY. This was largely due to lower base in 2QFY13. This geography continues to face challenges as far as approvals are concerned. Cadila had started its operations in Mexico during the 1QFY14 with the launch of two drugs. During the current quarter, the company made four more filings and launched two more drugs.

  • JVs witnessed weak growth of 17.8% YoY for the quarter. This was largely attributable to lower sales realized from Hospira. As per the management, the Bayer JV contributes least to the top line. On the positive side, the company has entered into a supply contract with Hospira for more APIs. The patents of the drugs have expired. Company expects ramp up in this segment with launch of new products going forward.

  • Operating margins remained flat at 14.9% for the quarter. This was despite forex loss being lower as compared to that in 2QFY13. Adjusting the impact of forex, EBITDA margins declined by 3.1% for the quarter. The margins were impacted at gross level owing to lower sales realized from the Indian business and JVs. By nature the Indian business has better margins as compared to others.

  • Bottom line jumped sharply by 93.4% YoY. This was largely due to sharp decline in tax expenses and lower finance costs. For FY14, the company has given tax rate guidance of 12-13% for the next 2-3 years.

    Key Highlights -

  • Transmerdals facility:Cadila received clearance for this facility from the USFDA. So far, the company has filed 7 transmerdals for the US market.

  • Para IV launches in US:Going forward, the company expects the launch of Asacol and Lialda in the US.

  • US insepection:The USFDA had recently inspected the company’s manufacturing plants and cleared all of them. We view this as a positive development, given the growing problems that Indian pharma companies have been facing on the USFDA regulatory front.

What to expect?

At the current price of Rs 667, the stock is trading at a multiple of 12.3 times our estimated FY16 earnings. Cadila’s growth going forward is highly dependent on product approvals in various geographies. The company has been quite proactive in filings for new drugs especially in the US market. It has built up a lucrative product pipeline and hence revenues are expected to ramp up going forward. Overall, we recommend that investors Hold on to 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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