3QFY2017 Result Update | Pharmaceutical

February 22, 2017

Cadila Healthcare

NEUTRAL

CMP

`440

Performance Highlights

Target Price

Investment Period

Y/E March (` cr)

3QFY2017 2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy)

Net sales

2,250

2336

(3.7)

2268

(0.8)

Stock Info

Other income

93.3

123

(36.6)

Sector

Pharmaceutical

Gross profit

1350

1493

(9.6)

1507

(10.4)

Market Cap (` cr)

45,034

Operating profit

343

499

(31.4)

500

(31.5)

Net debt (` cr)

1,550

Adj. Net profit

282

338

(16.6)

431

(34.7)

Beta

0.8

Source: Company, Angel Research

52 Week High / Low

460 / 305

For 3QFY2017, Cadila Healthcare posted lower than expected results with sales

Avg. Daily Volume

92,837

at `2,250cr (v/s. `2,800cr expected) v/s. `2,268cr in 3QFY2016, a yoy de-

Face Value (`)

growth of 0.8%. The dip in sales was on the back of the US (`886.9cr, a yoy dip

BSE Sensex

28,762

of 17.2%). On the operating front, the EBITDA margin came in at 15.2% (v/s.

Nifty

8,908

22.1% expected) v/s. 22.0% in 3QFY2016. The GPM’s came in at 60% (v/s.

Reuters Code

CADI.BO

66.5% in 3QFY2016), which resulted in dip in OPM. The Adj. net profit came in

Bloomberg Code

CDH@IN

at `282cr (v/s. `517cr expected) v/s. `431cr in 3QFY2016, a yoy de-growth of

34.7%. We remain Neutral.

Shareholding Pattern (%)

Results lower than expected: Sales at `2,250cr (v/s. `2,800cr expected) v/s.

Promoters

74.8

`2,268cr in 3QFY2016, posted a yoy de-growth of 0.8%. The dip in sales was on

MF / Banks / Indian Fls

9.4

the back of poor performance from the US (`886.9cr, a yoy dip of 17.2%). On

FII / NRIs / OCBs

10.2

the operating front, the EBITDA margin came in at 15.2% (v/s. 22.1% expected)

Indian Public / Others

5.6

vs. 22.0% in 3QFY2016. The GPM’s came in at 60% (v/s. 66.5% in 3QFY2016),

which resulted in dip in OPM. The Adj. net profit came in at `282cr (v/s. `517cr

expected) v/s. `431cr in 3QFY2016, a yoy de-growth of 34.7%.

Abs.(%)

3m 1yr 3yr

Sensex

10.8

21.3

38.9

Outlook and valuation: We expect Cadila’s net sales to post 15.2% CAGR to

Cadila

18.6

34.4

131.4

`12,569cr and EPS to report 13.5% CAGR to `19.2 over FY2016-18E. We

maintain our Neutral rating on the stock.

3-Year Daily Price Chart

Key financials (Consolidated)

500

Y E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

400

Net sales

8,497

9,469

10,393

12,569

300

% chg

20.4

11.4

9.8

20.9

200

Net profit

1,159

1,524

1,340

1,964

100

% chg

41.5

31.5

(12.1)

46.6

EPS

11.3

14.9

13.1

19.2

EBITDA margin (%)

18.8

21.2

17.7

21.6

Source: Company, Angel Research

P/E (x)

38.8

29.5

33.6

22.9

RoE (%)

30.1

31.7

22.8

27.1

RoCE (%)

20.2

23.1

17.4

23.6

P/BV (x)

10.6

8.4

7.0

5.6

EV/Sales (x)

5.4

4.8

4.3

3.5

Sarabjit Kour Nangra

+91 22 39357600 Ext: 6806

EV/EBITDA (x)

28.8

22.7

24.4

16.0

[email protected]

Source: Company, Angel Research; Note: CMP as of February 21, 2017

Please refer to important disclosures at the end of this report

Cadila Healthcare | 3QFY2017 Result Update

Exhibit 1: 3QFY2017 performance (Consolidated)

Y/E March (` cr)

3QFY2017

2QFY2017

% chg (qoq)

3QFY2016

% chg (yoy)

9MFY2017 9MFY2016

% chg

Net Sales

2,250

2,336

(3.7)

2,268

(0.8)

6,802

6,801

0.0

Other Income

93.3

123

(36.6)

205

367

(44.3)

Total Income

2,328

2,377

(2.1)

2,391

(2.7)

7,007

7,169

(2.3)

Gross profit

1350

1493

(9.6)

1507

(10.4)

4286

4433

(3.3)

Gross margin (%)

60.0

63.9

66.5

63.0

65.2

Operating profit

343

499

(31.4)

500

(31.5)

1291

1486

(13.2)

Operating Margin (%)

15.2

21.4

22.0

19.0

21.9

Financial Cost

(64.7)

(45.5)

(5.1)

Depreciation

3.9

21.2

261

216

20.8

PBT

324

435

(25.3)

537

(39.6)

1200

1601

(25.1)

Tax

107

(52.8)

(44.4)

254

240

5.7

Adj. PAT before

274

328

(16.4)

446

(38.6)

946

1361

(30.5)

Extra-ordinary item

Exceptional loss/(gain)

(0)

(9)

(1)

(3)

Minority

(8)

(30)

Reported PAT

282

338

(16.6)

431

(34.6)

975

1366

(28.6)

Adj. PAT

282

338

(16.6)

431

(34.7)

976

1369

(28.7)

EPS (`)

2.8

3.3

4.2

9.5

13.4

Source: Company, Angel Research

Exhibit 2: 3QFY2017 - Actual vs. Angel estimates

(` cr)

Actual

Estimates

Variance

Net Sales

2,250

2,800

(19.7)

Operating profit

343

619

(44.6)

Tax

115

(56.1)

Net profit

282

517

(45.5)

Source: Company, Angel Research

Revenue lower than our expectation

In INR terms, the consolidated revenues came in at `2,250cr (v/s. `2,800cr

expected) v/s. `2,268cr in 3QFY2016, de-growth of 0.8% yoy, owing to the

pressure on the US generic market.

The Formulation business sales (`1,863cr, down 4.0% yoy), was mainly due to the

US (`886.9cr, 17.2% dip yoy), Indian Formulation (`796.8cr, a yoy growth

10.7%), Emerging market Formulation (`113cr, a yoy up 20.6%) and Latin

America formulation (`65.9cr, a yoy growth of 21.1%). The other Business &

Alliances (`438.9cr) grew by 16.2% yoy. Europe Formulation (`65.3cr, a yoy dip of

14.1%), Consumer Wellness (`111.3cr, a yoy growth of 0.2%), Animal Healthcare

(`113.4cr, a yoy growth of 44.4%), API (`105.3cr, a yoy growth of 25.7%) and

Alliances (`43.5cr, a yoy dip of 53.9%).

US revenues declined ~17.2% yoy, mainly on base business base, primarily due to

Loss of Bupropion sales and pricing pressure in Tamsulosin. The company

launched 1 new product in the US in 3QFY2017. Cumulatively the company has

received 107 ANDA approvals, till date. The management has guided for 8-9

additional ANDA approvals by Mar’2017. Additionally Cadila filed 30 ANDAs in

2QFY2017; cumulatively the company has > 200 pending ANDA’s in the US market.

LatAm (Latin America) business was the only bright spot along with the Emerging

markets as revenues increased by ~21%yoy to `65.9cr in 3QFY2017 and by

20.6% yoy to `1,139cr respectively.

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Exhibit 3: Sales trend in the US and Europe

1,200

1,072

989

961

1,000

887

848

800

600

400

200

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Europe

Source: Company, Angel Research

The growth in the domestic market (~49% of sales) was of 14.9% yoy, mainly led

by Animal Health & Others (`1,134cr), which grew by 44.4%; while formulations

(`796.8cr) grew by 10.7% yoy. API (`105.3cr), on the other hand, grew by 25.7%

yoy.

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

900

821

786

797

767

800

713

700

600

500

400

300

200

118

117

116

112

111

100

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Domestic Formulation

Consumer division

Source: Company, Angel Research

OPM lower than expectation

On the operating front, the EBITDA margin came in at 15.2% (v/s.

22.1%

expected) vs. 22.0% in 3QFY2016. R&D expenditure, during the quarter, came in

at 9.8% (v/s. 10.4% of sales in 3QFY2016). The dip in the OPM, came on back of

the GPM coming at 60.0% (vs. 66.5% in 3QFY2016).

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Exhibit 5: OPM trend

22.0

21.4

20.0

21.4

20.4

18.0

16.0

15.2

14.0

12.0

10.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Net profit plunges 34.7% yoy: Consequently, the Adj. PAT came in at `282cr (v/s.

`517cr expected) v/s.

`281.6cr in 3QFY2016), yoy de-growth of

34.7%.

Moreover, the dip in the net profit was also impacted due to the lower other

income, which came in at `78.1cr (v/s. `123cr in 3QFY2016), a yoy dip of 36.6%.

Exhibit 6: Adjusted Net profit trend

500

431

450

388

400

356

338

350

282

300

250

200

150

100

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Concall takeaways

 Specialty business to contribute ~30% of US sales in four years.

 Moraiya remediation to start from February 2017.



20 ANDA approvals expected in FY2018 (excluding Moraiya plant).

 Setynl sales are ~US$58mn and will be part of company’s sales for ~70 days

in 4QFY2017. Sentynl growth is expected to be ~25% yoy.

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Recommendation rationale

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

with sales of about `2,973cr in FY2016; 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.

The company, on an aggressive front, launched more than 75 new products in

FY2014. During FY2009-14, the company reported a ~13% CAGR in its top-line

in the domestic formulation business.

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 ~4.7% of sales, registered a

growth of 3.2% during FY2016.

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. In FY2014,

sales were lower; however, FY2016 witnessed a rebound. During FY2016-18E, we

expect the domestic segment to grow at a CAGR of 9.4%.

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 FY2016 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 `3,393cr on the sales front in FY2016. 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 16.7% over FY2016-18E.

Outlook and valuation

We expect Cadila’s net sales to post 15.2% CAGR to `12,569cr and EPS to report

13.5% CAGR to `19.2 over FY2016-18E. We maintain our Neutral rating on the

stock.

Exhibit 7: Key Assumptions

Key assumptions

FY2017E

FY2018E

Domestic growth (%)

9.0

13.0

Exports growth (%)

10.0

25.7

Growth in employee expenses (%)

16.8

13.5

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

17.7

21.6

Capex (` cr)

650

Source: Company, Angel Research

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Exhibit 8: One-year forward PE band

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

FY2018E

FY16-18E

FY2018E

(`)

% PE (x) EV/Sales (x) EV/EBITDA (x)

CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

593

19.5

2.6

12.2

(10.8)

27.5

25.3

Aurobindo Pharma Buy

686

877

27.9

14.5

2.4

10.1

18.1

22.5

26.1

Cadila Healthcare Neutral

440

22.9

3.6

16.6

13.5

23.6

27.1

Cipla

Sell

593

465

(21.5)

24.2

2.7

16.3

14.2

12.2

13.9

Dr Reddy's

Neutral

2,899

22.1

2.6

11.4

(2.7)

15.3

15.2

Dishman Pharma Neutral

229

20.3

2.3

10.0

13.3

10.3

10.9

GSK Pharma*

Neutral

2,683

44.5

6.8

32.8

16.9

37.5

34.5

Indoco Remedies Reduce

272

240

(11.8)

17.0

2.0

10.9

33.2

19.1

20.1

Ipca labs

Accumulate

554

613

10.7

28.1

1.9

12.7

36.5

8.8

9.4

Lupin

Buy

1,469

1,809

23.1

21.2

4.0

13.1

17.2

24.4

20.9

Sanofi India

Neutral

4,186

24.3

3.2

17.4

22.2

25.6

28.8

Sun Pharma

Buy

673

847

25.8

19.1

4.0

12.2

26.5

18.9

20.1

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

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Profit & Loss statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Gross sales

6,285

7,208

8,658

9,660

10,589

12,806

Less: Excise duty

129

148

161

190

196

237

Net sales

6,155

7,060

8,497

9,469

10,393

12,569

Other operating income

203

164

154

368

Total operating income

6,358

7,224

8,651

9,838

10,762

12,938

% chg

20.8

13.6

19.8

13.7

9.4

20.2

Total expenditure

5,232

6,024

6,896

7,457

8,552

9,850

Net raw materials

2,320

2,714

3,197

3,277

3,846

4,274

Other mfg costs

387

443

534

595

653

790

Personnel

903

1,071

1,209

1,334

1,559

1,770

Other

1,622

1,796

2,107

2,252

2,494

3,017

EBITDA

923

1,036

1,601

2,012

1,842

2,719

% chg

1.4

12.3

54.6

25.6

-8.5

47.7

(% of Net Sales)

15.0

14.7

18.8

21.2

17.7

21.6

Dep. & amortisation

183

201

287

302

393

439

EBIT

740

835

1,314

1,710

1,448

2,280

% chg

(1.7)

12.8

57.4

30.1

(15.3)

57.5

(% of Net Sales)

12.0

11.8

15.5

18.1

13.9

18.1

Interest & other charges

169

Other income

(% of PBT)

Recurring PBT

811

959

1,456

2,124

1,826

2,658

% chg

2.1

18.3

51.8

45.9

(14.0)

45.6

Extraordinary exp./(Inc.)

PBT (reported)

811

942

1,445

2,124

1,826

2,658

Tax

119.5

106.0

259.4

571.1

456.5

664.6

(% of PBT)

14.7

11.3

17.9

26.9

25.0

PAT (reported)

692

836

1,186

1,553

1,370

1,994

Less: Minority int. (MI)

36.4

32.6

35.5

30.0

PAT after MI (reported)

655

804

1,151

1,523

1,340

1,964

ADJ. PAT

655

819

1,159

1,524

1,340

1,964

% chg

0.8

25.0

41.5

31.5

(12.1)

46.6

(% of Net Sales)

10.6

11.4

13.5

16.1

16.6

15.9

Adj.Basic EPS (`)

6.4

8.0

11.3

14.9

16.9

19.2

Adj. Fully Diluted EPS (`)

6.4

8.0

11.3

14.9

16.9

19.2

% chg

0.8

25.0

41.5

31.5

13.4

13.5

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

102

Reserves & Surplus

2,938

3,337

4,149

5,250

6,302

7,978

Shareholders funds

3,040

3,439

4,252

5,352

6,404

8,081

Minority interest

119

144

169

135

165

195

Total loans

2,681

2,265

2,334

2,107

Other Long Term Liabilities

Long Term Provisions

110

Deferred tax liability

100

121

122

Total liabilities

6,053

6,075

6,966

7,820

8,798

10,505

APPLICATION OF FUNDS

Gross block

4,104

3,756

4,353

5,296

5,946

6,596

Less: Acc. depreciation

1,358

1,540

1,827

2,130

2,523

2,962

Net block

2,746

2,214

2,526

3,166

3,423

3,634

Capital Work-in-Progress

248

892

Goodwill

862

908

733

Investments

154

266

Long Term Loans and Adv.

411

495

637

756

663

728

Current assets

3,191

3,391

4,105

4,205

5,635

7,656

Cash

582

549

670

695

1,617

2,866

Loans & advances

279

341

334

335

336

337

Other

2,330

2,501

3,102

3,174

3,682

4,453

Current liabilities

1,426

1,912

2,081

2,196

2,814

3,403

Net Current assets

1,765

1,480

2,024

2,008

2,821

4,253

Mis. Exp. not written off

(1)

Total assets

6,053

6,075

6,966

7,820

8,798

10,505

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2013 FY2014 FY2015 FY2016 FY2017E FY2018E

Profit before tax

811

942

1,445

2,124

1,826

2,658

Depreciation

183

201

287

302

393

439

(Inc)/Dec in Working Cap.

(223)

168

(565)

(78)

202

(247)

Less: Other income

Direct taxes paid

119

106

259

571

457

665

Cash Flow from Operations

614

1,154

853

1,683

1,871

2,091

(Inc.)/Dec.in Fixed Assets

(860)

(296)

(597)

(943)

(650)

(Inc.)/Dec. in Investments

(65)

(68)

(112)

Other income

Cash Flow from Investing

(820)

(310)

(609)

(960)

(556)

Issue of Equity

Inc./(Dec.) in loans

382

(397)

(242)

(16)

Dividend Paid (Incl. Tax)

(175)

(216)

(287)

Others

115

(264)

(168)

(90)

(1)

Cash Flow from Financing

322

(877)

(122)

(697)

(393)

(286)

Inc./(Dec.) in Cash

116

(33)

121

922

1,249

Opening Cash balances

467

582

549

670

695

1,617

Closing Cash balances

582

549

670

695

1,617

2,866

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

68.7

55.0

38.8

29.5

33.6

22.9

P/CEPS

53.6

44.0

31.1

24.6

25.9

18.7

P/BV

14.8

13.1

10.6

8.4

7.0

5.6

Dividend yield (%)

1.7

EV/Sales

7.6

6.6

5.4

4.8

4.3

3.5

EV/EBITDA

50.6

44.7

28.8

22.7

24.4

16.0

EV / Total Assets

7.7

7.6

6.6

5.8

5.1

4.1

Per Share Data (`)

EPS (Basic)

6.4

8.0

11.3

14.9

13.1

19.2

EPS (fully diluted)

6.4

8.0

11.3

14.9

13.1

19.2

Cash EPS

8.2

10.0

14.2

17.9

17.0

23.5

DPS

7.5

Book Value

29.7

33.6

41.5

52.3

62.6

78.9

Dupont Analysis

EBIT margin

12.0

11.8

15.5

18.1

13.9

18.1

Tax retention ratio

85.3

88.7

82.1

73.1

75.0

Asset turnover (x)

1.2

1.3

1.5

1.7

ROIC (Post-tax)

12.8

13.8

18.6

19.4

15.7

23.8

Cost of Debt (Post Tax)

5.8

3.2

2.4

1.6

3.0

Leverage (x)

0.7

0.6

0.4

0.3

0.2

0.0

Operating ROE

17.7

20.1

25.8

25.2

17.9

23.8

Returns (%)

ROCE (Pre-tax)

13.2

13.8

20.2

23.1

17.4

23.6

Angel ROIC (Pre-tax)

19.5

20.6

31.3

33.6

26.2

39.4

ROE

23.3

25.3

30.1

31.7

22.8

27.1

Turnover ratios (x)

Asset Turnover (Gr. Block)

1.8

2.1

2.0

1.9

2.1

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.7

0.5

0.4

0.3

0.1

(0.1)

Net debt to EBITDA

2.3

1.7

1.0

0.7

0.3

(0.3)

Int. Coverage (EBIT / Int.)

4.4

9.3

19.4

35.2

17.2

27.1

February 22, 2017

Cadila Healthcare | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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offering of securities of the company covered by Analyst during the past twelve months.

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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

4. Broking relationship with company covered under Research

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)

February 22, 2017