CADILA HEALTHCARE LIMITED

Cadila Healthcare Limited. (Cadila) has reported dismayed set of numbers for the quarter ended June’11 after a strong performance in FY11. The company has recorded revenues of Rs. 12456.9 mn with a growth of 9.9%, with PAT growing to Rs. 2298.2 mn, a growth of 15.4%. The following are the key highlights of the results which are summarized below:

Key Highlights of Q4FY11

· Revenues grew by 9.9% YoY from Rs. 11337.8 mn in Q1FY11 to Rs. 12456.9 mn in Q1FY12. The company witnessed disappointing growth of 4.8% in its domestic formulation business as compared to a growth of 8.5% in its export formulation business.
· Domestic Business excluding Bayer JV registered a meager growth of 4.9% from Rs. 5675 mn in Q1FY11 to Rs. 5946 mn in Q1FY12. The domestic formulations segment was dissatisfying with a mere 4.8% growth on the back of transfer of a few products to the Bayer JV and higher sales in the previous quarter. Consumer business during the quarter exhibited a muted 7% growth, largely due to higher material cost, disruption of sales on account of plant closure for 2 weeks. Nutralite also saw a 15% price increase in the quarter, the immediate response to which was not pleasing. However, the company’s management is optimistic of achieving 15% growth in the domestic formulations business and a 15-20% growth in its consumer business.
· Export formulations business registered a growth of 8.5% to Rs. 4136 mn on the back of a strong growth witnessed in select geographies mainly Europe (22%), Brazil (21%), and Japan (26%). However, the company witnessed a sluggish growth of 7.5% in US formulations and 18% de-growth in the emerging market formulations. The management is optimistic of reverting back to historical strong growth rates in the US and emerging markets. On the export API front, the company saw a 25% decline in revenues mainly on account of decline in sales from the Zydus-Nycomed JV.
· Cadila registered a threefold growth in its JV business at Rs. 1127 mn with the major contributor being the Hospira JV. The quarter also saw the commencement of operations of the Bayer JV.
· Higher employee cost and other expenses caused operating margins to decline to 24.3% from 25.8% YoY resulting in mere 3.2% growth in operating profits to Rs. 3023.9 mn as against Rs. 2930.2 mn in Q1FY11.
· Net Profit grew by 15.4% YoY from Rs. 1991.8 mn to Rs. 2298.2 mn in Q1FY12 whereas margins were at 18.4% on the back of lower tax rate and interest cost during the quarter.

OUTLOOK & VALUATION

We view the muted growth in Q1FY12 as a pause from the aggressive sales activity taken up by the company for achieving the $ 1 bn target in FY11. With a vision of the management of tripling its business by FY15, we believe Cadila's future growth is still intact and will be led by increased traction in its international businesses, a ramp-up in supplies to Hospira and a sustained double-digit growth in the domestic formulations and consumer businesses. However, we believe the stock performance may remain muted in the near term on the back of lower sales growth momentum and the warning letter overhang on its Injectibles facility. We maintain our FY12E & FY13E estimates as we believe it is fairly achievable and recommend a HOLD on the stock with a target price of Rs. 960 (based on 20x its FY13E EPS of Rs. 47.9). It is currently trading at a P/E of 18.4x its FY13E EPS of Rs. 47.9.