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Cadila Health.: Forex hits margins
Nov 26, 2012

Cadila Healthcare has announced its 2QFY13 results. The company has reported 25% YoY growth in sales and a 6% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 25% YoY during the quarter led by growth in both the domestic and exports businesses.
  • Operating margins declines by 4.3% due to lower sales in Brazil and forex loss of Rs 641 m in 2QFY13, vs Rs 114 m in 2QFY12
  • Bottom line falls by 5.7% YoY during 2QFY13 due to a surge in interest costs and tax expenses.

Financial performance: A snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 12,364 15,476 25.2% 24,821 31,420 26.6%
Expenditure 9,993 13,170 31.8% 19,428 25,540 31.5%
Operating profit (EBDITA) 2,372 2,306 -2.7% 5,393 5,881 9.0%
EBDITA margin (%) 19.2% 14.9%   21.7% 18.7% 3.0%
Other income 110 65 -41.5% 174 160 -8.0%
Interest (net) 769 405 -47.3% 880 978 11.1%
Depreciation 375 433 15.2% 723 867 20.0%
Profit before tax 1,338 1,533 14.6% 3,964 4,195 5.8%
Tax 235 494 110.1% 521 1,148 120.5%
Profit after tax/(loss) 1,103 1,039 -5.7% 3,444 3,048 -11.5%
Net profit margin (%) 8.9% 6.7%   13.9% 9.7%  
No. of shares (m)         204.7  
Diluted earnings per share (Rs)         30.0  
Price to earnings ratio (x)*         27.5  
*based on trailing 12 months earnings

What has driven performance in 2QFY13?
  • The topline of Cadila Healthcare registered a healthy 25% YoY growth during the quarter driven by strong growth in its domestic and exports businesses.

    Revenue break-up
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Domestic            
    Formulations 4,700 6,018 28.0% 9,274 11,836 27.6%
    API 68 116 70.6% 134 224 67.2%
    Consumer & Others 1,332 1,503 12.8% 2,638 3,031 14.9%
    - Consumer products 879 965 9.8% 1,793 1,998 11.4%
    - Animal health & others 453 538 18.8% 845 1,033 22.2%
    Total domestic (i) 6,100 7,637 25.2% 12,046 15,091 25.3%
    Exports            
    Formulations 4,893 5,820 18.9% 9,029 11,772 30.4%
    - North America (US) 3,070 3,674 19.7% 5,463 7,266 33.0%
    - Europe 619 762 23.1% 1,388 1,617 16.5%
    - Brazil 655 487 -25.6% 1,125 1,131 0.5%
    - Japan 120 143 19.2% 232 282 21.6%
    - Emerging markets 429 754 75.8% 821 1,476 79.8%
    APIs 563 588 4.4% 1,243 1,238 -0.4%
    Animal Health 84 102 21.4% 84 218 100.0%
    JVs 750 1,300 73.3% 1,876 2,595 38.3%
    Total exports (ii) 6,290 7,810 24.2% 12,232 15,823 29.4%
    Grand Total (i+ii) 12,390 15,447 24.7% 24,278 30,914 27.3%

  • The domestic formulations business witnessed a robust growth of 28% YoY during 2QFY13. Excluding the Biochem acquisition, growth was at 18% YoY. This was led by existing products and the launch of 15 new products including line extensions. Zydus Wellness recorded a growth of 9% YoY during the quarter. This business had been facing rough weather over the past few quarters on account of competition and the company has been taking steps to bolster growth. However, the company witnessed growth improvement in its "Sugar free" and "Everyuth" brands. The domestic Animal Health business grew by 26% YoY during 2QFY13.

  • The US business recorded a growth of 20% YoY during the quarter, however in constant currency terms growth was flat during the quarter. The company filed 10 new ANDAs including three for injectable drugs. Cadila is looking to strengthen its presence in the injectables and transmerdals segment in the US. Europe witnessed growth of 23% on the back of new launches. Brazil revenues declined 26% due to the ongoing strike in ANVISA. However, company expects growth to come back on track in the coming quarters. Revenues from emerging markets grew by 76% YoY, due to new product launches and lower base in the previous year on the back of turmoil in a few geographies. Over and above the acquired business of Bremer's, the animal health business grew by 21% at Rs102 m.

  • JVs witnessed growth of 73%, due to better traction in docetaxel revenues of its partner. However, Cadila does not expect this trend to continue going forward. In the future, the JV segment will grow on the back of commercial supply of products from the Abbott deal, API supply for 14 products in Nycomed JV, and new oncology products supply from Hospira JV. The company will incur capex of US$ 10m (total capex is for US$ 20 m, US$ 10 m will be contributed by Cadila) for Hospira JV on back of addition of 8-10 new products.

  • Gross margins declined by 5.3%, due to lower realization of sales from Brazil and forex loss of Rs 641 vs. forex gain of Rs 180; excluding the forex impact, gross margins remained flat. This flowed into operating margins too, which declined by 4.3% due to forex. Adjusting the forex impact margins stood at 19% (decline of 1% YoY). This was largely due to increase in operating expenditure. The R&D expenses grew by 38%, accounting for 7.5% of total sales. The company has guided for R&D expenses at 6%-7% for the full year.

  • Bottom line fell by 5.7% YoY during 2QFY13 due to a surge in interest costs and tax expenses. For the current quarter tax rate was at 32%, for the full year, the company has raised the tax rate guidance to 25%-27%.

What to expect?
At the current price of Rs 857, the stock is trading at a multiple of 16.1 times our estimated FY15 earnings. Cadila's growth going forward will be driven by increasing scale of its US business and maintaining healthy growth in the domestic market. The JVs are also expected to contribute to overall growth. After receiving clearance from USFDA's warning letter, company expects to make quality launches like injectables and Transmerdals in the upcoming period. We remain cautious on the impact of the pricing policy on the company's domestic business and margins of wellness segment owing to a tough competitive scenario. Overall, we are positive on the stock from a long term perspective and recommend a 'Buy' on the stock.

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