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Cadila Healthcare: Acquisitions drive growth - Views on News from Equitymaster
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Cadila Healthcare: Acquisitions drive growth
Nov 19, 2007

Performance summary
  • Topline grows by 28% YoY led by the growth in export formulations and consumer healthcare businesses.
  • Operating margins shrink by 1.4% due to higher raw material, staff and other expenditure (as percentage of sales).
  • The net profit growth of 12.5% YoY is slower than the operating profit growth due to reduction in other income and higher interest costs.

Financial performance: A snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 4,748 6,097 28.4% 9,207 11,819 28.4%
Expenditure 3,658 4,780 30.7% 7,220 9,390 30.1%
Operating profit (EBDITA) 1,090 1,317 20.8% 1,987 2,429 22.2%
EBDITA margin (%) 23.0% 21.6%   21.6% 20.6%  
Other income 18 10 -44.4% 5 104 1980.0%
Interest (net) 69 137 98.6% 125 210 68.0%
Depreciation 213 235 10.3% 410 474 15.6%
Profit before tax 826 955 15.6% 1,457 1,849 26.9%
Tax 100 114 14.0% 175 235 34.3%
Extraordinary item - (24)   49 (24)  
Profit after tax/(loss) 726 817 12.5% 1,331 1,590 19.5%
Net profit margin (%) 15.3% 13.4%   14.5% 13.5%  
No. of shares (m) 125.6 125.6   125.6 125.6  
Diluted earnings per share (Rs)*         21.3  
Price to earnings ratio (x)*         13.6  
(* on a trailing 12-months basis)

What is the company’s business?
Cadila Healthcare is one of the leading players in the Indian pharma market having a presence in both the domestic and international markets. In India, Cadila consolidated its position with the acquisition of Recon Healthcare and German Remedies. In the international markets, the company had adopted the strategy of competing directly in the generics market and also focusing on contract manufacturing. As part of its generics strategy, Cadila acquired Alpharma’s arm in France in 2003 to foray into the French generics market and also started filing its own ANDAs for the US market. On the contract manufacturing front, Cadila has a JV with Altana for the latter’s drug ‘Protonix’ and has also entered into more such contracts with other innovator companies.

What has driven performance in 2QFY08?
Topline scenario: Cadila’s topline for the quarter registered a robust 28% YoY growth driven by the splendid 122% YoY growth in formulations exports, 37% YoY growth in its consumer healthcare business and contribution from its acquisitions. That said, domestic formulations witnessed a slower growth due to the high base effect last year, when the industry grew at a strong pace due to the incidence of various acute diseases.

The growth in exports formulations was led by the impressive 123% YoY and 38% YoY growth in the US and French generics business respectively. As far as the US is concerned, the company launched 3 new products during the quarter – ‘Benzonatate’, ‘Carvedilol’ and ‘Amlodipine Besylate’. The company so far has made 66 ANDA filings out of which 30 have been approved so far. As regards the French business, 3 dossiers for new products and 9 additional site transfer applications were filed during the quarter.

Margins contract: Operating margins declined by 1.4% during the quarter owing to a rise in raw material and staff costs and other expenditure (as percentage of sales). Staff costs increased led by the consolidation of its acquisitions. Sharp appreciation of the rupee against the dollar may also have played a hand in pressurizing margins. Having said that, Cadila’s French generics business has witnessed a turnaround in 1HFY08 and reported a marginal profit for the quarter.

Cost break-up
(% sales) 2QFY07 2QFY08 1HFY07 1HFY08
Raw material consumption 18.8% 19.6% 17.4% 23.0%
Purchase of traded goods 15.9% 13.1% 17.0% 11.6%
Staff cost 10.8% 12.7% 10.8% 11.4%
Other expenditure 31.6% 33.0% 33.2% 33.4%

Bottomline picture: Bottomline growth (up 12.5%) was slower than the 20% YoY growth in operating profits. This was due to the 44% YoY reduction in other income and higher interest costs (up 86% YoY).

Quarterly trend
(%) 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Net sales growth 20.8% 22.6% 25.0% 25.9% 28.4% 28.4%
Operating profit margin 21.0% 23.0% 17.4% 16.3% 19.4% 21.6%
Net profit margin 79.5% 54.8% 66.2% 31.7% 27.8% 13.4%

What to expect?
At the current price of Rs 289, the stock is trading at a price to earnings multiple of 9.9 times our estimated FY10 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. While the patent expiry of the drug 'Protonix' is expected to considerably reduce revenues and profitability from this JV, the company is looking to counter the same through the JV that it has inked with Mayne Pharma. Having said that, while we expect margins to improve in FY08 on the back of growth in profits of the French generics business and increasing product approvals in the US market, the same are likely to reduce going forward due to declining margins from the Altana JV. Ability to sustain the pricing pressure in the global generics market and grow its profits after the patent expiry of ‘Pantoprazole’ will be the key challenges for Cadila. Overall, we maintain our positive view on the stock.

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