Cadila Healthcare Ltd (Q3FY07): BUY - Investment Update
Cadila Healthcare Limited’s (CHL) Q3 FY07 results were better than expectations. Key positives are significant growth (188.3% yoy and 106.1% qoq) and declining losses of Zydus France as well as maintaining the growth momentum in the US market. Domestic formulations sales were muted for the third quarter in a row, growing a dismal 6.2% for 9M FY07. Implementation of VAT in Tamil Nadu in December, which accounts for nearly Rs70mn of sales per month affected domestic formulation sales. However growth is likely to return to normal in Q4 FY07. Despite this strong topline growth, OPM contracted by 200bps due to higher spending on R&D (6.3% of sales vs 4.3%) and advertising for the quarter. One time income of Rs196mn on account of sale of branded business in France propelled 66% bottomline growth to Rs659mn translating into an annualized EPS of Rs21.
Post result conference call with the management has further reaffirmed our view about increasing clarity on CHL’s international operations. The management has highlighted that Q3 FY07 figures for Zydus France were not one off in nature and 60-70% growth in this market was achievable for FY08. Further the company is on track to turn EBIDTA positive for this market in FY07. US sales are going strong and with a wide basket of products, we believe 40% growth is achievable in US. CRAMS business has not run out of steam with CHL signing additional 3 contracts for the quarter, taking total contracts to 20 with peak revenue potential of US$27.5mn. The JV with Mayne for oncology products continues despite the latter being acquired by Hospira and the management believes that numbers would be bigger than estimated earlier due to wider geographic reach of Hospira. The domestic formulations business is likely to clock above average growth after a muted 9M FY07. Post the strong performance in 9M FY07 and increased visibility on earnings, we have increased our FY07 & FY08 estimates by Rs1.3 and Rs2 respectively. We thereby raise our target price to Rs416. We maintain BUY on the stock.