• JULY 9, 2002

Cadila: Racing ahead

A 16% rise in turnover reported by Cadila for FY02 is quite encouraging, especially considering the fact that the first half yearly growth was a mere 7%. On an annual basis, operating margins have also shown an improvement. The company has ambitious plans to emerge amongst the top 3 pharmaceutical companies in India by March 2004. Post the acquisition of controlling stake in German Remedies, the company is open to further in-organic growth.

(Rs m)FY01FY02Change
Sales 5,088 5,888 15.7%
Other Income 74 41 -44.1%
Expenditure 4,351 4,997 14.8%
Operating Profit (EBDIT) 737 891 20.9%
Operating Profit Margin (%)14.5%15.1%
Interest (46) 11 -123.8%
Depreciation 149 188 26.1%
Profit before Tax 708 734 3.6%
Profit after Tax/(Loss) 653 672 2.9%
Net profit margin (%)12.8%11.4% 
No. of Shares (eoy) (m)6060 
Diluted Earnings per share*10.911.2 
P/E (at current price) 12.1 

The strong growth rate in the last two quarters has been possible due to launch of new products in the neuroscience division, acquisition of perpetual rights to market five leading brands from Asta and acquisition of 'Aten' brand from Kopran last year. Further, the company has also logged several co-marketing alliances with Kopran, Ranbaxy and E-Merck. However, margins in this business are low compared to other businesses which partially explains the drop in overall margins.Realising its over dependence on few slow growing therapeutic segments, the company has made some rapid moves, including acquisitions, which will strongly position the company in some of the fast growing therapeutic segments. In its bid to further fuel in-organic growth, Cadila acquired the Vadodara-based Banyan Chemicals Ltd (BCL) for Rs 205 m.

The acquisition of BCL is expected to help the company in exploring export markets. BCL already has a US FDA approved unit for the manufacture of bulk drugs with export sales of Rs 250 m to Geneva Pharmaceuticals Technology Corporation of the US, a subsidiary of Novartis. The company plans to rapidly penetrate the export markets in the US through BCL. While the acquisition of BCL would give Cadila direct entry into the US bulk drug market, exports of formulations would take another two years, as the company is in the process of getting US FDA approval for the formulation plant. Cadila has plans to keep BCL as a separate subsidiary, though it may consider merging it with itself later.

It may be recalled that the company acquired a 27.7% stake in German Remedies for a consideration of Rs 1.5 bn last year. It also acquired perpetual rights to market five leading brands from Asta (one of the promoter of German Remedies). Post that the company did an open offer for the shareholders of German Remedies, taking the total stake in the company to 55.4%. The financing of the same would be done through a mix of debt (Rs 2,000 m) and internal accruals. The company has made a secondary open offer for German Remedies shareholders at a price of Rs 300/- per share for acquiring the remaining shareholding (45%) in GRL. In the event of the company's shareholding crossing 90% through the proposed open offer, it plans to seek the delisting of GRL.

Cadila-German Remedies: Merged Picture
Rs mCadila German RemediesMerged Entity*
Net Sales 5,8881,9607,848
Operating Margins (%)15.1%19.1%16.1%
Net Profit672249921
EPS (Rs.)NANA15.4

The in-organic growth strategy of Cadila group has no doubt helped it to create a robust entity. However, what is concerning is the rising interest burden on the company. The debt figure has risen considerably in last one year to fund its acqusitions and research initiatives. The payback period of these acquisitions would have to justify the rise in interest costs. Further, the company has yet to prove its performance in the exports market. The valuations of the company going forward would thus depend on how fast the debt backed acquisitions of the company payoff. At the current market price of Rs 135, the stock trades at 9x its FY02 earnings on a consolidated basis.

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