Pharmaceuticals Nov 14, 2019

Cadila Healthcare
India Research

Bloomberg: CDH IN
RESULT REVIEW Reuters: CADI.BO BUY
Domestic formulations and
lic US generics showing Recommendation
CMP: Rs234
improved traction Target Price: Rs274
Previous Target Price Rs286
Cadila’s revenues increased by 13.7% on a YoY basis to Rs 33.6 bn (our estimate
Upside (%) 17.1%
of Rs 35.6 bn) during the quarter. Operating margins were lower at 18.6% in
Q2FY20 (much lower than our estimates of 19.8%) compared to 23.2% in Q2FY19 Stock Information
Market Cap. (Rsbn / US$ mn) 240/3335
due to higher staff, overheads and R & D cost. Net Profit de-grew by 74.3% YoY
52-week High/Low (Rs) 375/207
to Rs 1,072 mn in Q2FY20 on account of impairment charge on account of generic 3m ADV (Rsmn /US$ mn) 324/5
competition in Levarphanol. Beta 0.9
Sensex/ Nifty 40,286/11,872
Domestic market and US sales show traction: US business grew by 9.7% YoY to
Share outstanding (mn) 1,024
Rs 14,484 mn, higher than our estimates of Rs 13,287 mn due to scale up in market
share, lower price erosion and volume and value growth. Domestic formulations Stock Performance (%)
1M 3M 12M YTD
revenue grew by 10.4% YoY to Rs 9,778 mn, lower than our estimates of Rs 10,156 Absolute 0.7 7.5 (36.9) (32.8)
mn. Restructuring and rationalization of SBUs is enabling the company to show Rel. to Sensex (4.5) (0.5) (45.0) (39.8)
better traction. Consumer wellness business grew by 135 % to Rs 3.2 bn. Emerging
Performance
Markets including Latam was up 7.6% to Rs 2.2 bn, Europe decreased by 21.7%
YoY to Rs 407 mn and Animal Health grew by 0.1% YoY to Rs 1,348 mn. 39,500 400
37,500
Margins decline : The Company's EBITDA margin at 18.6% in Q2FY20 is lower 300
35,500
than 23.2% in Q2FY19 due to higher material cost of 35.6% as against 34.9%in Q2
33,500 200
FY19E, higher staff cost and other expenses (22.2% in Q2FY20 as against of 17.2%

Aug-19
Mar-19
Nov-18
Dec-18

Oct-19
Nov-19
Feb-19

Apr-19
Jun-19
Jul-19
Q2FY19). The company had an impairment charge of Rs 2681 mn on account of
Leverphanol on account of generic competition. Net profit decreased by 74.3% YoY Sensex (LHS) Cadila Healthcare (RHS)
to Rs 1072 mn as against Rs 4175 mn in Q2FY19 mainly due to impairment and
Source: Bloomberg
higher finance and depreciation cost on account of Heinz.

Outlook & Valuation: We downgrade our Revenues by 0.8%/0.8% in FY20E/FY21E

Earnings Revision
due to downgrade in EM business. We downgrade our EBDITAM by 140bps/120
(%) FY20E FY21E
bps to 19.3%/19.3% for FY20E /FY21E due to higher staff, overheads and R & D
Revenue 0.8 0.8
cost. We downgrade our EPS by 4.9%/4.1% to Rs 14.3/Rs 16.1 for FY 20E/FY21E.
We downgrade our price target to Rs 274 based on 17x FY 21E, but maintain our EBITDA 7.4 6.6
BUY rating on the stock. EPS 4.9 4.1

Exhibit 1: Key Financials Source: Karvy Stock Broking

Y/E Mar (Rsmn) FY17 FY18 FY19 FY20E FY21E

Net sales 96,253 119,544 131,656 142,084 153,970
EBITDA 19,036 28,475 29,731 27,470 29,747
Net Profit 15,171 17,946 18,488 14,693 16,486
EPS(Rs) 14.8 17.5 18.1 14.3 16.1
EPS growth (%) (21.6) 18.3 3.0 (20.5) 12.2
EBITDA margin (%) 19.8 23.8 22.6 19.3 19.3
PER(x) 15.8 13.4 13.0 16.3 14.5
EV/EBITDA (x) 14.4 9.8 10.3 10.9 9.8
RoCE(%) 17.1 19.5 16.4 11.5 12.0
RoE(%) 22.5 21.0 17.2 11.8 12.2
Analysts Contact
Rahul Sharma
Source: Company, Karvy Stock Broking……………………………………………………….. Consolidated 022 - 6176 0817
rahul.sharma@karvy.com

vinesh.vala@karvy.com
 Nov 14, 2019

Cadila HC

Key highlights:
US business posted sales of Rs 14.5 bn, which is up by 9.7% YoY in Q2FY20. US
base generics business excluding Sentanyl and one time Testosterone gel AG grew
by 22% on YoY basis. In Q2FY20 US sales increased on the back of market share
gain in existing products. Opportunities do exist on account of shortages in the
market. Price erosion was 1.8% Q-o-Q for the company in the US market. The
company has shown increase in volume and value growth.

Company has received 6 ANDA approvals and also filed 8 additional ANDAs
with US FDA for Q2FY20. During the quarter, company has launched 7 new
products in the US market.

Company expects to grow in high single digit excluding the one-time AG business
on the back of 15 new product launches in H2FY20E and 31 product launches in
FY20E.

India business : The business grew by 10%, where branded portfolio grew at
faster pace of 11.5% for the quarter. Gyanecology, Derma and Hormone therapy
performed better than the market during the quarter. The brands with annual sales
in excess of Rs 500 mn grew by 12% YoY and brands between Rs 250 -500 mn
witnessed a growth over 20% during the quarter.

Company has started revamping its business system for remaining regions and
expects to complete the same by Q3FY20. Other revamped regions have started to
stabilise and showed improvement in sales.

Heinz : The company’s Glucon D and Nycil gained market share on the back of
integration of channel partners, supply chain and procurement processes. After
the high seasonal demand for products between January to June, sales will taper in
H2FY20.

Regulatory update :

Cadila Healthcare has received the warning letter for the Moraiya facility.
Remediation work has been completed to a large extent and will be ready for re-
inspection by USFDA by June 2020. The current status of the Moraiya plant will
not affect its US business. Company has initiated Site Transfer of injectible assets to
the Liva facility which would be complete by the end of FY20. It has currently
discontinued its injectible products sale which impacted Emerging markets
revenues.

During the quarter company’s manufacturing facilities of Oral solid dosage

formulations at Baddi and API manufacturing facility at Ankleshwar completed
USFDA inspections without any observations. In October 2019, API facility at
Dabasa also completed USFDA inspection successfully without any observation.

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Exhibit 1: Quarterly performance

Y/E Mar (Rsmn) Q2FY20 Q1FY20 Q2FY19 QoQ % YoY %
Net Sales 33666 34963 29612 (3.7) 13.7
Cost 27410 28643 22734 (4.3) 20.6
EBITDA 6256 6320 6878 (1.0) (9.0)
EBITDA Margin (%) 18.6 18.1 23.2
Other Income 269 226 304 19.0 (11.5)
Interest 867 888 354 (2.4) 144.9
Loss/(Profit) on forex loans 30 3 3 900.0 900.0
Depreciation 1723 1716 1475 0.4 16.8
Profit before Tax 1224 3939 5350 (68.9) (77.1)
Tax 395 791 1247 (50.1) (68.3)
Tax rate (%) 32.3 20.1 23.3
Profit after Tax 829 3148 4103 (73.7) (79.8)
Minority Interest -132 217 107 (160.8) (223.4)
Profit after Minority Interest 961 2931 3996 (67.2) (76.0)
Share of profit from associates 111 105 179 5.7 (38.0)
Reported Net Profit 1072 3036 4175 (64.7) (74.3)
Source: Company, Karvy Stock Broking

Exhibit 2: Actual vs estimates

Y/E Mar (Rs. mn) Q2FY20 Q2FY20E Deviation %
Total Revenues 33666 35578 -5.4%
EBITDA 6256 7038 -11.1%
EBITDA Margin (%) 18.6% 19.8% -120bps
Profit before Tax 1224 4653.03 -73.7%
Reported Net Profit 1072 3750 -71.4%

Source: Company, Karvy Stock Broking

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Change in Estimates
FY20E FY21E
Y/E Mar (Rs. Mn) Change Change Comments
New Old New Old
% %
Domestic formulations 38,852 38,852 - 42,717 42,717 -

US 59,248 59,248 - 63,421 63,421 -

Emerging markets /Latam 4,397 4,709 (6.6) 4,665 4,890 (4.6) lowered in line with H1

Heinz 12,420 12,420 - 13,414 13,414 -

Revenues 142,084 143,255 (0.8) 153,970 155,157 (0.8)

EBITDA 27,470 29,659 (7.4) 29,747 31,835 (6.6)

EBITDA margin (in %) 19.3 20.7 (1.4) 19.3 20.5 (1.2)

Other income + Int. Income 994 1,136 (12.5) 1,244 1,588 (21.7) lower other income factored

Interest charges 3,522 3,646 (3.4) 3,435 3,644 (5.7) lower interest charges in lieu of repayment

Depreciation 7,091 7,472 (5.1) 7,440 7,819 (4.8) in lieu of H1

PBT 17,852 19,677 (9.3) 20,116 21,960 (8.4)

Tax 3,427 3,829 (10.5) 3,926 4,331 (9.4)

Minority Interest (200) (868) (77.0) (220) (955) (77.0)

Share of profit of Associates 469 469 - 516 516 -

Net Profit 14,693 15,449 (4.9) 16,486 17,190 (4.1)

EPS (in Rs.) 14.3 15.1 (4.9) 16.1 16.8 (4.1)

Source: Company, KarvyStock Broking

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Financials
Exhibit 3: Profit and Loss
Y/E Mar (Rsmn) FY17 FY18 FY19 FY20E FY21E
Net Sales 96,253 119,544 131,656 142,084 153,970
% growth 0.1 24.2 10.1 7.9 8.4
Raw Material 34,451 41,220 47,164 50,167 53,937
Staff 15,002 18,545 21,241 24,427 27,358
Others Exps 27,764 31,304 33,520 40,020 42,928
Total Expenditure 77,217 91,069 101,925 114,614 124,223
EBITDA 19,036 28,475 29,731 27,470 29,747
EBITDA margin (%) 19.8 23.8 22.6 19.3 19.3
Other income 1,286 1,132 2,011 994 1,244
Interest 635 1,108 1,958 3,522 3,435
Depreciation 3,750 5,388 5,986 7,091 7,440
Profit Before Tax 16,122 23,308 23,821 17,852 20,116
Tax 1,289 5,644 5,303 3,427 3,926
Effective tax rate (%) 8.0 24.2 22.3 19.2 19.5
Net Profit 14,833 17,664 18,518 14,424 16,191
Share of profit of Associates 338 628 469 469 516
Minority Interest 0 -346 -499 -200 -220
Profit After Minority Interest 15,171 17,946 18,488 14,693 16,486
Extraordinaries -3 -188 0 0 0
Reported Net Profit 15,168 17,758 18,488 14,693 16,486
Source: Company, Karvy Stock Broking

Exhibit 4: Balance Sheet

Y/E Mar (Rsmn) FY17 FY18 FY19 FY20E FY21E
Equity 1,024 1,024 1,024 1,024 1,024
Minority Interest 1,561 1,910 12,929 12,929 12,929
Reserves 68,576 86,421 102,839 113,198 124,728
Net worth 71,161 89,355 116,792 127,151 138,681
Short-term Loans 24,769 25,575 31,969 33,088 36,651
Long-term Loans 24,684 25,551 39,497 37,734 32,734
Total Loans 49,453 51,126 71,466 70,822 69,385
Deferred tax Liability -4,006 -6,425 -7,180 -7,534 -7,534
Liabilities 116,608 134,056 181,078 190,440 200,533
Gross Block 81,029 93,385 157,023 165,303 172,886
Depreciation 23,478 28,559 35,386 42,477 49,917
Net Block 57,551 64,826 121,637 122,826 122,969
Capital work-in-progress 15,433 15,272 8,372 9,092 9,509
Investments 4,348 7,457 6,735 9,320 9,320
Inventories 18,037 23,853 26,880 29,478 32,042
Debtors 22,775 32,063 39,508 42,582 46,196
Cash 15,435 13,149 6,493 11,040 17,582
Other Current assets 13,458 14,787 15,503 17,263 18,553
Total Current assets 69,705 83,852 88,384 100,363 114,374
Creditors 16,736 18,884 19,226 20,450 21,987
Other current liabilities 13,693 18,467 24,824 30,712 33,653
Total current liabilities 30,429 37,351 44,050 51,162 55,640
Net current assets 39,276 46,501 44,334 49,201 58,734
Total Assets 116,608 134,056 181,078 190,440 200,533
Source: Company, Karvy Stock Broking

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Exhibit 5: Cash Flow Statement

Y/E Mar (Rsmn) FY17 FY18 FY19 FY20E FY21E
EBIT 15,286 23,087 23,745 20,379 22,307
(Inc.)/Dec in working capital (1,130) (9,511) (4,489) (320) (2,991)
Cash flow from operations 14,156 13,576 19,256 20,059 19,316
Other income 1,286 1,132 2,011 994 1,244
Depreciation 3,750 5,388 5,986 7,091 7,440
Interest paid (-) (635) (1,108) (1,958) (3,522) (3,435)
Tax paid (-) (1,289) (5,644) (5,303) (3,427) (3,926)
Dividends paid (-) (3,938) (4,337) (4,337) (4,337) (4,956)
Extraordinary (3) (188) - - -
Minority interest - (346) (499) (200) (220)
Forex 185 197 23 - -
Deferred Tax liability (4,617) (2,419) (755) (354) -
Net cash from operations 8,895 6,251 14,424 16,305 15,464
Capital Expenditure (-) (29,546) (12,502) (55,897) (9,000) (8,000)
Free Cash Flow (20,651) (6,251) (41,473) 7,305 7,464
Inc./(dec.) in borrowings 25,033 1,673 20,340 (644) (1,437)
(Inc.)/Dec. in Investments (1,685) (3,109) 722 (2,585) -
Equity issue/(Buyback) 665 956 13,186 - -
Cash from Financial Activities 24,013 (480) 34,248 (3,229) (1,437)
Others 4,731 4,445 569 471 516
Opening cash 7,342 15,435 13,149 6,493 11,040
Closing cash 15,435 13,149 6,493 11,040 17,582
Change in Cash 8,093 (2,286) (6,656) 4,547 6,542
Source: Company, KarvyStock Broking

Exhibit 6: Key Ratios

Y/E Mar FY17 FY18 FY19 FY20E FY21E
EV/EBDITA(x) 14.4 9.8 10.3 10.9 9.8
ROE (%) 22.5 21.0 17.2 11.8 12.2
ROCE (%) 17.1 19.5 16.4 11.5 12.0
PE(x) 15.8 13.4 13.0 16.3 14.5
P/S(x) 2.5 2.1 1.9 1.7 1.6
P/BV(x) 3.4 2.7 2.1 1.9 1.7
Source: Company, Karvy Stock Broking

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Cadila HC

Stock Ratings Absolute Returns

Buy : > 15%
Hold : 5-15%
Sell : < 5%

For further enquiries please contact:

research@karvy.com
Tel: +91-22-61491500

Disclosures Appendix

Analyst certification
The following analyst(s), Rahul Sharma, who is (are) primarily responsible for this report and whose name(s) is/are
mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about
the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or
indirectly related to the specific recommendation(s) or views contained in this research report.

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Cadila HC

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