Cadila Healthcare: Strong Q4, encouraging outlook

Analysts expect the company’s US growth to remain strong and domestic demand to bounce back leading to an up to 18 per cent upside in the stock

Cadila Healthcare's performance for the March'15 quarter comprehensively surprised the Street on the profit front. The company's top line growth and profitability was largely helped by US sales, which at about 43 per cent of topline grew 44.4 per cent. This drove overall sales higher by 16.2 per cent year- on-year, offsetting the domestic sales, which still remain weak (up just 8.8 per cent).

US sales were helped largely by anti-malarial generic hydroxychloroquine, while other generics as those of urinary tract drug Urocit-k too continue to do well. Domestic sales continued to bear the brunt of new drug pricing policy and losing manufacturing rights of pain relief brand Buscopan and laxative brand Dulcolux (loss of sales of about ~70-80 crore per annum).

While the company's sales of ~2,288 crore were marginally lower than Bloomberg consensus estimate of ~2,306 crore, earnings before interest, tax, depreciation and amortisation (Ebitda) at ~496 crore were much better than estimates of ~466 crore. Lower costs as well as lower R&D expenses helped. Thus, margins at 21.7 per cent came better than expected 20.2 per cent. Consequently, profits at ~351 crore were higher than expectations of ~305 crore. Adjusted for one-offs at ~387 crore, the profits grew 47 per cent year-on-year and 39.6 per cent, sequentially. The stock gained 1.8 per cent to close at ~1,688 on Friday and is up nearly five per cent in three sessions post the results.

Notably, Cadila's strong performance is likely to continue. With top line for FY15 growing by a healthy 20 per cent, margins have also rebounded from close to 16.6 per cent in FY14 to 20.1 per cent. Analysts expect the growth momentum to continue besides healthy gains on the margin front. Management expects another 100 basis point improvement in margins during FY16.

On the flip side, the outcome of observations of the US Food and Drugs Administration (USFDA) on its Moraiya plant is pending. The stock, which had more than doubled from 52-week low of ~872.55 on May 19, 2014 to an all-time high of ~1,998 on April 7, 2015, had corrected as investor sentiments had turned a bit cautious after the inspection of Moraiya plant by the FDA. While the Street was expecting some negative observations, the fears till now have proved futile. Analysts at Ambit had observed that the FDA observations primarily pertain to customer feedback on complaints and are not serious. The complete resolution of 483 can boost investor confidence.

Meanwhile, Cadila's product pipeline for the US remains decent with 260 filings and 99 approvals. The approvals expected in niche transdermals, nasal sprays, and controlled release products can accelerate its growth. Analysts also expect Cadila's domestic sales growth to bounce back, as monthly data suggest that its pharma sales growth has crossed double digits.

Edelweiss' analysts add that Cadila expects the pace of ANDA approval to pick up (1520 in FY16) as several facilities have been cleared by the USFDA. “We believe FY16 guidance of ~10,000 crore revenue and 21 per cent margins are conservative if these approvals come through,” the analysts said. They estimate Cadila's EPS to clock a compound annual growth rate, or CAGR, of 34 per cent over FY15-17.

Most analysts remain positive on the stock. Their target prices point to a potential upside of up to 18 per cent.