2QFY2018 Result Update | Pharmaceutical

November 24, 2017

Cadila Healthcare

REDUCE

CMP

`443

Performance Highlights

Target Price

`411

Y/E March (` cr)

2QFY2018 1QFY2018

% chg (qoq) 2QFY2017

% chg (yoy)

Investment Period

3,155

2,136

47.7

2336

35.0

Net sales

102

23.0

151.5

Other income

Stock Info

2054

1014

102.6

1535

33.8

Gross profit

Sector

Pharmaceutical

778

216

260.7

499

55.8

Operating profit

Market Cap (` cr)

45,321

Adj. Net profit

503

138

263.7

380

32.5

Net debt (` cr)

3,616

Source: Company, Angel Research

Beta

1.0

Cadila Healthcare posted good set of numbers for 2QFY2018. Sales came in at

52 Week High / Low

558 / 330

`3,155cr (`2,800cr expected) v/s. `2,336cr in 2QFY2017, a yoy growth of 35.0%,

Avg. Daily Volume

116,575

mainly driven by 66.2% growth in sales of US formulations. On operating front,

Face Value (`)

the EBITDA margins came in at 24.7% (21.3% expected) v/s. 21.4% in 2QFY2017,

BSE Sensex

33,562

on the back of higher than expected sales. Thus, the PAT came in at ` 503cr V/s

Nifty

10,342

`414cr expected. We maintain reduce with a price target of `411.

Reuters Code

CADI.BO

Bloomberg Code

CDH@IN

Results better than expected: Sales came in at `3,155cr (`2,800cr expected) v/s.

`2,336cr in 2QFY2017, a yoy growth of 35.0%, mainly driven by 66.2% yoy growth

in sales of US formulations to `1644cr. On operating front, the EBITDA margins

Shareholding Pattern (%)

came in at 24.7% (21.3% expected) v/s. 21.4% in 2QFY2017, on the back of

Promoters

74.8

higher than expected sales. Thus, the PAT came in at ` 503cr v/s `414cr

MF / Banks / Indian Fls

10.0

expected. Gross margins came in at 65.1% v/s. 65.7% in 2QFY2017, while R&D

FII / NRIs / OCBs

10.0

expenses were 8.7% of sales in 2QFY2018 v/s. 7.8% of sales in 2QFY2017. Thus,

Indian Public / Others

5.2

the PAT came in at ` 503cr (` 414cr expected) v/s. `380cr in 2QFY2017.

Outlook and valuation: We expect Cadila’s net sales to post 18.4% CAGR to

Abs.(%)

3m 1yr 3yr

`12,926cr and EPS to register 18.9% CAGR to `20.5 over FY2017-19E. We maintain

Sensex

6.3

29.3

17.8

Cadila

(4.3)

19.3

42.8

reduce rating.

Key financials (Consolidated)

3-Year Daily Price Chart

Y E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

600

9,072

9,220

11,365

12,926

Net sales

500

6.8

1.6

23.3

13.7

% chg

400

1,936

1,488

1,886

2,102

300

Net profit

67.0

-23.2

26.7

11.5

200

% chg

18.9

14.5

18.4

20.5

100

EPS

21.7

18.4

20.0

EBITDA margin (%)

23.4

30.5

24.0

21.6

P/E (x)

38.9

23.5

24.3

22.2

RoE (%)

Source: Company, Angel Research

22.8

13.4

15.6

16.5

RoCE (%)

8.0

6.5

5.3

4.4

P/BV (x)

Sarabjit Kour Nangra

5.1

5.2

4.0

3.4

EV/Sales (x)

+91 22 39357600 Ext: 6806

23.3

28.3

20.0

17.2

EV/EBITDA (x)

[email protected]

Source: Company, Angel Research; Note: CMP as of November 22, 2017

Please refer to important disclosures at the end of this report

Cadila Healthcare | 2QFY2018 Result Update

Exhibit 1: 2QFY2018 performance (Consolidated)

Y/E March (` cr)

2QFY2018

1QFY2018

% chg (qoq) 2QFY2017

% chg (yoy)

1HFY2018

1HFY2017

% chg

Net Sales

3,155

2,136

47.7

2,336

35.0

5,291

4,553

16.2

Other Income

102

23.0

151.5

184

126

45.7

Total Income

3,257

2,850

14.2

2,377

37.0

5,475

4,679

17.0

Gross profit

2054

1014

102.6

1535

33.8

3361

2935

14.5

Gross margin (%)

65.1

61.2

6.5

65.7

63.5

64.5

(1.5)

Operating profit

778

216

260.7

499

55.8

994

948

4.8

Operating Margin (%)

24.7

10.1

21.4

18.8

20.8

(9.8)

Financial Cost

85.4

117.1

119.3

Depreciation

127

122

3.9

46.6

249

171

45.7

PBT

712

154

361.3

435

63.9

867

875

(1.0)

Tax

182

514.2

182.2

242

119

103.2

Adj. PAT before

530

125

325.0

370

43.3

625

756

(17.3)

Extra-ordinary item

Exceptional loss/(gain)

Minority

82.6

(33)

(37)

(11.8)

Reported PAT

503

138

263.7

380

32.5

642

778

(17.6)

Adj. PAT

503

138

263.7

380

32.5

642

778

(17.6)

EPS (`)

4.9

5.7

3.7

6.3

7.6

Source: Company, Angel Research

Exhibit 2: 2QFY2018 - Actual vs. Angel estimates

(` cr)

Actual

Estimates

Variance

Net Sales

3,155

2,800

12.7

Operating profit

778

560

38.8

Tax

182

107

70.4

Net profit

503

377

33.4

Source: Company, Angel Research

Revenue higher than our expectation

Sales came in at `3,155cr (`2,800cr expected) v/s. `2,336cr in 2QFY2017, a

yoy growth of 35.0%, mainly driven by the USA Formulations sales. Indian

formulation sales registered (`894cr) a yoy growth of 9.0%. USA, growth was

mainly driven by 180-day exclusive launch of gLialda.

The dip in the domestic business was primarily due to destocking of

inventories with the implementation of GST. The sales recorded in key

markets were US (`1,644cr, up 66.2% yoy), Indian Formulation (`895cr, a yoy

growth of 9.0%), Emerging market Formulation (`131cr, grew 15.9% yoy) and

Latin America formulation (`68cr, a yoy growth of 2.8%).

The Alliances (`23.7cr) de-grew by 5.9% yoy, comprising Europe Formulation

(`54cr, a yoy dip of 2.3%), Consumer Wellness (`119cr, a yoy growth of 7.1%),

Animal Healthcare (`128cr, a yoy growth of 4.2%) and API (`93cr, a yoy

growth of 11.7%).

Company filed for 9 ANDAs and received 32 approvals in 2QFY2018. Post

successful resolution of the Moraiya plant USFDA issue, the company

expects ~80 ANDA approvals until FY2019 for the company. Around ~50% of

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

these are expected to come from the Moraiya facility and the rest from

Baddi and SEZ facilities.

Exhibit 3: Sales trend in the US and Europe

1,800

1,644

1,600

1,400

1,200

989

985

965

1,000

887

800

600

400

200

2QFY2017

3QFY2017

4QFY2017

1QFY2018

2QFY2018

Europe

Source: Company, Angel Research

The growth in the domestic market was mainly led by Indian Formulation

(`895cr) registering growth of 9.0% & Animal Health & Others (`128cr), which

grew by 4.2%. API (`92.9cr), on the other hand, grew by 11.7% yoy.

Exhibit 4: Sales trend in Domestic Formulation and Consumer Wellness Divisions

1000

895

900

840

821

797

800

700

637

600

500

400

300

200

112

111

120

115

120

100

2QFY2017

3QFY2017

4QFY2017

1QFY2018

2QFY2018

Domestic Formulation

Consumer division

Source: Company, Angel Research

OPM better than expectation

On operating profit front, the EBITDA margins came in at 24.7% (21.3% expected)

v/s. 21.4% in 2QFY2017, mainly on the back of higher than expected sales. Thus,

the PAT came in at ` 503cr V/s `414cr expected. Gross margins came in at 65.1%

v/s. 65.7% in 2QFY2017, while R&D expenses were 8.7% of sales in 2QFY2018 v/s.

7.8% of sales in 2QFY2017.

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Exhibit 5: OPM trend

30.0

25.0

24.7

21.4

20.0

16.7

15.0

15.2

10.0

10.1

5.0

0.0

2QFY2017

3QFY2017

4QFY2017

1QFY2018

2QFY2018

Source: Company, Angel Research

Net profit plunges 32.5% yoy: Consequently, the Adj. PAT came in at `503cr

(`377cr expected) v/s. `380cr in 2QFY2017, a yoy growth of 32.5%. A 46.6%

yoy rise in deprecation and financial expenses, up by 117.1% yoy resulted in

the overall growth in net profit lower than growth in the operating profit.

Exhibit 6: Adjusted Net profit trend

600

503

500

380

386

400

324

300

200

138

100

2QFY2017

3QFY2017

4QFY2017

1QFY2018

2QFY2018

Source: Company, Angel Research

Concall takeaways

 Management expects US business to witness price erosion to be 10- 12%

in FY2018E and 8- 10% in FY2019E. It has guided for overall US revenue

(reported) growth in FY19E, despite high base due to gLialda sales in

180- days exclusivity in FY2018E

 Cadila Healthcare received EIR for Ahmedabad SEZ facility in

2QFY2018, on top of similar EIR in Moraiya and Baddi facilities in

1QFY2018.

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Recommendation rationale

Strong domestic portfolio: Cadila is the fifth largest player in the domestic

market with sales of about `3,244cr in FY2017; the domestic market

contributes ~39% to its top-line. The company enjoys a leadership position in

the CVS, GI, women healthcare and respiratory segments, and has a sales

force of 4,500 executives. Further, the company has a strong consumer

division through its stake in Zydus Wellness, which has premium brands such

as Sugarfree, Everyuth and Nutralite under its umbrella. This segment, which

contributes ~4.9% of sales, registered a growth of 13.6% during FY2017.

Going forward, the company expects the segment to grow at an above

industry rate on the back of new product launches and field force

expansion. Sales were lower in FY2017,however, FY2018 should witness a

rebound. During FY2017-19E, we expect the domestic segment to grow at

a CAGR of 14.3%.

Exports on a strong footing: Cadila has a two-fold focus on exports, wherein

it is targeting developed as well as emerging markets, which contributed

around 61% to its FY2017 top-line. The company has established a

formidable presence in the developed markets of US, Europe (France and

Spain) and Japan. In the US, the company achieved critical scale of

`3,709cr on the sales front in FY2017. The growth in exports to the US along

with other regions like Europe would be driven by new product launches,

going forward. Overall, exports are expected to post a CAGR of 23.7% over

FY2017-19E.

Outlook and valuation

We expect Cadila’s net sales to post 18.4% CAGR to `12,926cr and EPS to

clock 18.9% CAGR to `20.5 over FY2017-19E. We maintain our reduce rating on

the stock.

Exhibit 7: Key Assumptions

Key assumptions

FY2018E

FY2019E

Domestic growth (%)

15.5

13.0

Exports growth (%)

33.0

15.0

Growth in employee expenses (%)

16.8

13.5

Operating margins (excl tech. know-how fees) (%)

20.0

Capex (` cr)

1,000

Source: Company, Angel Research

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Exhibit 8: One-year forward PE band

700

600

500

400

300

200

100

Price

14x

21x

28x

Source: Company

Company background: Cadila Healthcare‘s operations range across API,

formulations, animal health products and cosmeceuticals. The group has

global operations spread across USA, Europe, Japan, Brazil, South Africa

and 25 other emerging markets. Having already achieved the US$1bn sales

mark in 2011, the company aims to be a research-driven pharmaceutical

company by 2020.

Exhibit 9: Recommendation Summary

Company

Reco

CMP Tgt. price Upside

FY2019E

FY17-19E

FY2019E

EV/Sales

EV/EBITDA

RoCE

RoE

(`)

CAGR in EPS (%)

(x)

(%)

Alembic Pharma

Buy

511

600

17.3

21.4

2.9

13.0

5.7

20.6

18.4

Aurobindo Pharma

Buy

699

823

17.8

13.6

2.5

9.9

14.2

25.3

22.7

Cadila Healthcare

Reduce

443

411

(7.2)

21.6

4.1

17.6

18.9

16.5

22.2

Cipla

Sell

619

462

(25.3)

25.5

3.2

16.2

39.3

10.9

13.1

Dr Reddy's

Reduce

2,361

2,040

(13.6)

23.2

3.1

13.3

18.5

10.3

12.4

Dishman Pharma

Under Review

301

19.3

2.7

10.1

23.3

4.5

4.4

GSK Pharma

Sell

2,496

2,000

(19.9)

53.9

6.9

39.3

19.3

25.8

23.5

Indoco Remedies

Sell

280

136

(49.0)

23.5

2.1

14.9

16.2

10.1

14.5

Ipca labs

Neutral

535

21.2

1.9

13.5

24.7

12.4

11.0

Lupin

Buy

828

1,091

31.8

16.7

2.4

9.3

(6.6)

13.7

Sanofi India*

Neutral

4,434

27.1

3.8

17.0

12.8

25.8

27.5

Sun Pharma

Buy

535

615

15.0

24.0

3.7

16.3

(17.5)

11.3

14.0

Source: Company, Angel Research; Note: *December year ending

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Profit & Loss statement (Consolidated)

Y/E March (` cr)

FY2014 FY2015

FY2016 FY2017 FY2018E

FY2019E

Gross sales

7,208

8,658

9,262

9,416

11,579

13,170

148

161

190

196

214

244

Less: Excise duty

Net sales

7,060

8,497

9,072

9,220

11,365

12,926

Other operating

164

154

355

210

income

Total operating income

7,224

8,651

9,427

9,430

11,574

13,136

% chg

13.6

19.8

9.0

0.0

22.7

13.5

6,024

6,896

7,099

7,526

9,086

10,337

Total expenditure

Net raw materials

2,714

3,197

3,096

3,445

4,091

4,524

443

534

570

579

714

812

Other mfg costs

Personnel

1,071

1,209

1,262

1,500

1,815

2,196

Other

1,796

2,107

2,172

2,002

2,466

2,805

1,036

1,601

1,973

1,694

2,278

2,589

EBITDA

% chg

12.3

54.6

23.2

-14.2

34.5

13.6

14.7

18.8

21.7

18.4

20.0

(% of Net Sales)

Dep. & amortisation

201

287

292

375

415

485

EBIT

835

1,314

1,681

1,319

1,863

2,103

12.8

57.4

27.9

-21.5

41.3

12.9

% chg

(% of Net Sales)

11.8

15.5

18.5

14.3

16.4

16.3

Interest & other charges

Other income

116

129

100

(% of PBT)

959

1,456

2,099

1,612

2,127

2,368

Recurring PBT

% chg

18.3

51.8

44.1

-23.2

32.0

11.3

Extraordinary exp./(Inc.)

PBT (reported)

942

1,445

2,099

1,612

2,127

2,368

Tax

106.0

259.4

177.4

128.9

212.7

236.8

11.3

17.9

8.5

8.0

10.0

(% of PBT)

PAT (reported)

836

1,186

1,921

1,483

1,915

2,131

32.6

35.5

30.0

29.1

Less: Minority int. (MI)

PAT after MI (reported)

804

1,151

1,934

1,488

1,886

2,102

ADJ. PAT

819

1,159

1,936

1,488

1,886

2,102

% chg

25.0

41.5

67.0

-23.2

26.7

11.5

(% of Net Sales)

11.4

13.5

21.3

16.1

16.6

16.3

8.0

11.3

18.9

14.5

18.4

20.5

Adj.Basic EPS (`)

Adj. Fully Diluted EPS (`)

8.0

11.3

18.9

14.5

18.4

20.5

% chg

25.0

41.5

67.0

(23.2)

26.7

11.5

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

SOURCES OF FUNDS

102

Equity share capital

Reserves & Surplus

3,337

4,149

5,597

6,858

8,456

10,270

Shareholders funds

3,439

4,252

5,699

6,960

8,559

10,374

144

169

135

156

185

214

Minority interest

Total loans

2,265

2,334

2,107

4,945

3,000

2,500

Other Long Term Liabilities

Long Term Provisions

110

169

Deferred tax liability

(318)

(401)

122

123

Total liabilities

6,075

6,966

7,782

11,875

12,081

13,428

APPLICATION OF FUNDS

3,756

4,353

4,786

5,436

6,436

7,436

Gross block

Less: Acc. depreciation

1,540

1,827

2,120

2,495

2,910

3,396

Net block

2,214

2,526

2,666

3,942

3,526

4,040

892

Capital Work-in-Progress

Goodwill

908

733

1,141

2,465

154

416

435

Investments

Long Term Loans and

495

637

836

997

Adv.

3,391

4,105

4,081

5,973

7,254

8,565

Current assets

Cash

549

670

639

1,544

1,871

2,488

Loans & advances

341

334

335

336

337

338

Other

2,501

3,102

3,108

4,094

5,046

5,739

Current liabilities

1,912

2,081

2,250

2,829

3,487

3,966

1,480

2,024

1,831

3,144

3,767

4,599

Net Current assets

Mis. Exp. not written off

Total assets

6,075

6,966

7,782

11,875

12,081

13,428

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

942

1,445

2,099

1,612

2,127

2,368

Profit before tax

Depreciation

201

287

292

375

415

485

(Inc)/Dec in Working Cap.

168

(565)

(37)

(570)

(295)

(215)

Less: Other income

116

129

100

Direct taxes paid

106

259

177

129

213

237

1,154

853

2,061

1,160

1,935

2,301

Cash Flow from Operations

(Inc.)/Dec.in Fixed Assets

(296)

(597)

(433)

(650)

(1,000)

(Inc.)/Dec. in Investments

(65)

(68)

(262)

(19)

Other income

116

129

100

Cash Flow from Investing

(310)

(609)

(579)

(540)

(900)

Issue of Equity

Inc./(Dec.) in loans

(397)

(222)

2,894

(1,944)

(499)

Dividend Paid (Incl. Tax)

(216)

(287)

Others

(264)

(1,004)

(2,322)

1,524

Cash Flow from Financing

(877)

(122)

(1,513)

285

(708)

(784)

(33)

121

(31)

905

327

617

Inc./(Dec.) in Cash

Opening Cash balances

582

549

670

639

1,544

1,871

Closing Cash balances

549

670

639

1,544

1,871

2,488

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Key Ratios

Y/E March

FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E

Valuation Ratio (x)

55.3

39.1

23.4

30.5

24.0

21.6

P/E (on FDEPS)

P/CEPS

44.3

31.3

20.3

24.3

19.7

17.5

P/BV

13.2

10.7

8.0

6.5

5.3

4.4

1.7

Dividend yield (%)

EV/Sales

6.6

5.5

5.1

5.2

4.0

3.4

45.0

29.0

23.3

28.3

20.0

17.2

EV/EBITDA

EV / Total Assets

7.7

6.7

5.9

4.0

3.8

3.3

Per Share Data (`)

EPS (Basic)

8.0

11.3

18.9

14.5

18.4

20.5

EPS (fully diluted)

8.0

11.3

18.9

14.5

18.4

20.5

10.0

14.2

21.8

18.2

22.5

25.3

Cash EPS

DPS

7.5

Book Value

33.6

41.5

55.7

68.0

83.6

101.3

Dupont Analysis

EBIT margin

11.8

15.5

18.5

14.3

16.4

16.3

88.7

82.1

91.5

92.0

90.0

Tax retention ratio

Asset turnover (x)

1.3

1.5

1.4

1.1

1.2

ROIC (Post-tax)

13.8

18.6

23.8

14.2

16.6

18.2

Cost of Debt (Post Tax)

3.2

2.4

2.2

1.2

1.0

1.5

Leverage (x)

0.6

0.4

0.3

0.4

0.3

0.1

20.1

25.8

30.8

19.1

21.5

19.3

Operating ROE

Returns (%)

ROCE (Pre-tax)

13.8

20.2

22.8

13.4

15.6

16.5

Angel ROIC (Pre-tax)

20.6

31.3

34.4

21.8

26.9

29.1

ROE

25.3

30.1

38.9

23.5

24.3

22.2

Turnover ratios (x)

Asset Turnover (Gr. Block)

1.8

2.1

1.8

1.9

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.5

0.4

0.3

0.5

0.1

0.0

Net debt to EBITDA

1.7

1.0

0.7

2.0

0.5

0.0

Int. Coverage (EBIT / Int.)

9.3

19.4

31.8

29.3

41.4

46.7

November 24, 2017

Cadila Healthcare | 2QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

Cadila Healthcare

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

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Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

November 24, 2017