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Cadila: Second quarter of slower growth
Nov 22, 2011

Cadila Healthcare has announced its second quarter results for 2012 (2QFY12). The company has reported 10.7% YoY growth in sales and 39.9% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by a mere 10.7% YoY due to slower growth in the domestic market and fall in sales of bulk drugs (APIs).
  • Operating margins (EBITDA) decrease by 2.7% due to increase in employee costs.
  • Net profits fall by 39.9% YoY mainly due to slower sales growth, hit on operating margins and higher finance charges.

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
Net sales 11,167 12,364 10.7% 22,505 24,821 10.3%
Expenditure 8,718 9,993 14.6% 17,083 19,426 13.7%
Operating profit (EBIDTA) 2,449 2,371 -3.2% 5,422 5,395 -0.5%
EBDITA margin (%) 21.9% 19.2%   24.1% 21.7%  
Other income 39 110 186.8% 67 174 158.2%
Depreciation 304 375 23.3% 618 723 16.9%
Financial Charges / (Income) 160 769 379.2% 476 880 84.9%
Profit before tax 2,022 1,337 -33.9% 4,395 3,965 -9.8%
Tax 254 235 -7.4% 592 521 -12.0%
Exceptional Gain / (Loss) - -   - -  
Forex Gain / (Loss) - -   - -  
Minority Interest (60) (75)   (103) (120)  
Profit after tax/(loss) 1,708 1,027 -39.9% 3,700 3,325 -10.1%
Net profit margin (%) 15% 8%   16% 13%  
No. of shares (m) 205 205   205 205  
Diluted earnings per share (Rs) 8 5   18 16  
Price to earnings ratio (x)*   21.5        
*On trailing 12 month basis

What has driven performance in 2QFY12?
  • Cadila's net sales registered a mere 10.7% YoY growth. This was due to the sluggish growth both in the domestic and exports market. Sales from the domestic market slowed from double digit growth to a growth of just 7.5% due to flat growth in its branded formulation business. The growth in the consumer division (15% of domestic sales) considerably slowed down to 10% on back of slowing demand for one of its established product - Sugar Free. The US market grew by 36% YoY and included sales of US$ 5 m from the US based company Nesher, which was acquired by Cadila during the quarter. However, the bulk drugs (API) export business saw a substantial de-growth of 30% YoY. This led to the slower exports growth of 15.3% YoY. Growth from the JVs was lower during the quarter; growth in the Hospira JV was shadowed by huge drop in the Nycomed sales. The company is looking to add more products to the Hospira JV, which currently has six products. The sales from the Abbott JV will commence from FY13.

    Revenue break-up
    (Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
    Domestic 5,675 6,100 7.5% 11,190 12,046 7.6%
    Formulations 4,409 4,700 6.6% 8,610 9,274 7.7%
    APIs 64 68 6.3% 156 134 -14.1%
    Wellness 799 879 10.0% 1,673 1,793 7.2%
    Animal Health & Others 403 453 12.5% 751 845 12.5%
    Exports 4,803 5,539 15.3% 9,518 10,356 8.8%
    Formulations 4,002 4,893 22.3% 7,815 9,029 15.5%
    US 2,258 3,070 36.0% 4,485 5,463 21.8%
    Europe 588 619 5.4% 1,220 1,388 13.8%
    Japan 98 120 21.8% 185 232 25.4%
    Brazil 584 655 12.2% 971 1,125 15.9%
    Emerging Markets 474 429 -9.6% 954 821 -13.9%
    APIs 801 563 -29.8% 1,703 1,243 -27.0%
    Animal Health & Others - 84   - 84  
    JVs 735 750 2.0% 1,187 1,876 58.0%
    Total 11,213 12,389 10.5% 21,895 24,278 10.9%

  • Operating margins (EBITDA) decreased by 2.7% due to drastic increase in employee costs. Increase in employee costs has been a common element witnessed by the pharma industry in the last one year. For Cadila, the employee cost increased by 210 bps (2.1%).

  • Net profits fell by 39.9% YoY due to slower sales growth, reduction in operating margins and huge increase in financial charges, which includes forex losses. Cadila's financial charges increased fourfold knocking down the quarterly profits.

  • Cadila has plans to launch 2 products through Nesher by FY12 and another 3 by FY13. As on date, Nesher has 1 product in the market, which gives the revenue of US$ 5 m per quarter. Cadila filed 5 ANDAs during the quarter totaling 136 ANDAs.

What to expect?
At the current price of Rs 712, the stock is trading at a multiple of 11.7 times our estimated FY14 earnings. The domestic and the US market had a muted growth for this quarter. However, Cadila's growth will be only be driven by increasing scale of its US business and maintaining decent growth in the domestic market. The sudden slowdown in the domestic formulation and consumer business has been a cause of concern. The JVs with different MNCs will continue to grow and is expected to contribute to Cadila's overall growth going forward.

However, pricing pressure in the global generics market and slowdown in domestic growth are key challenges for Cadila. The sales and profit performance has not been up to the mark for the quarter. That said, we are positive about the growth prospects of the company from a long term perspective and recommend a 'HOLD' on the stock at the current price.

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