Cadila Healthcare

1QFY2012 Result Update | Pharmaceutical
July 20, 2011
Cadila Healthcare
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Adj. PAT 1QFY2012 1,174 78 160 230 187 4QFY2011 1,169 48 731 184 179 % chg (qoq) 0.4 64.7 (78.1) 25.4 4.7 1QFY2011 1,055 82 729 218.7 159 % chg (yoy) 11.2 (3.8) (78.0) 5.3 17.7
BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 19,457 0.3 984 / 599 19,622 5 18,502 5,567 CADI.BO CDH@IN
`882 `1,053
12 months
Source: Company, Angel Research
For 1QFY2012, Cadila Healthcare (Cadila) reported results that were mostly in-line with our expectations, except on the operating front, which reported lower-than-expected performance. Management has re-affirmed its guidance of US$3bn by FY201516. The stock is trading at 24.7x FY2012E and 18.1x FY2013E earnings. We maintain Buy with a revised target price of `1,053. Results in-line, except on the operating front: For 1QFY2012, Cadila reported net sales of `1,174cr, up 11.2% yoy, higher than our estimates of `1,280cr, driven by the domestic formulation sales and CRAMs JV. On the domestic front, net sales grew by 9% yoy to `436cr (`398.2cr). Gross margin for the quarter declined to 69.1% (69.1%). OPM also declined to 19.6% (20.7%) during the quarter, majorly due to the increase in employee expenses and R&D expenses, which rose by 26.5% and 34.2%, respectively. Adjusted net profit increased by 17.7% yoy to `187.4cr (`159.2cr), higher than our estimates of `179cr. However, reported net profit came in at `234.3cr, registering growth of 15.1% yoy, aided by lower interest expenses and higher other income (of which `44.6cr was contributed by the licensing income from Abbott). Outlook and valuation: We expect Cadilas net sales to post a 20.5% CAGR to `6,478cr and EPS to report a 24.8% CAGR to `52.6 over FY201113E. We maintain Buy on the stock with a revised target price of `1,053.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 74.8 14.5 5.9 4.8
Abs.(%) Sensex Cadila
3m (5.0) 4.0
1yr 3.5
3yr 35.7
37.3 334.1
Key financials (Consolidated)

Y E March (` cr) Net sales % chg Net profit % chg EPS EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
FY2010 3,574 24.9 667 120.1 24.7 24.0 35.7 47.6 26.4 10.9 5.2 21.8
FY2011 4,465 24.9 693 3.8 33.8 18.9 26.1 36.5 22.6 8.2 4.2 22.2
FY2012E 5,336 19.5 791 14.2 38.6 19.8 22.8 31.7 25.3 6.3 3.4 17.2
FY2013E 6,478 21.4 1,078 36.4 52.6 20.2 16.8 33.4 27.3 4.9 2.7 13.5
Sarabjit Kour Nangra

+91 22 39357600 Ext: 6806 sarabjit@angelbroking.com
Please refer to important disclosures at the end of this report
Cadila Healthcare | 1QFY2012 Result Update
Exhibit 1: 1QFY2012 performance (consolidated)

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin (%) Operating profit Operating margin (%) Financial cost Depreciation PBT Provision for taxation PAT before extraordinary item Exceptional Minority PAT after extraordinary item & MI EPS (`)
1QFY2012 1,174 78 1,252 160 13.7 230 19.6 11 35 263 29 234 0 4 187 9.2
4QFY2011 1169 48 1,216 731 68.5 184 15.7 3 32 197 10 186 0 7 179 8.8
% chg (qoq) 0.4 64.7 2.9 (78.1) 25.4 275.4 9.4 33.7 174.4 25.9 (37.8) 4.7
1QFY2011 1055 82 1137 729 64.4 218.7 20.7 32 31 237 34 204 40 4 159 7.8
% chg (yoy) 11.2 (3.8) 10.1 (78.0) 5.3 (64.7) 10.6 10.8 (15.5) 15.1 11.8 17.7
FY2011 4,465 178.6 4,643 2,989 67.0 842.3 18.9 70 127 824 106 718 0 25 693 33.8
FY2010 3,574 128.6 3,703 2,396 67.0 857.8 24.0 82 134 770 74 696 5 25 667 24.7
% chg 24.9 38.9 25.4 24.8 -1.8 (14.9) -5.2 7.0 43.5 3.1 (100.0) 3.8
Exhibit 2: 1QFY2012 Actual vs. Angel estimates

(` cr) Net sales Other income Operating profit Tax Adj. net profit
Actual 1,174 78 230 29 187
Estimates 1,280 38 262 43 179
Variance (%) (8.4) 106.6 (12.3) (33.5) 4.7
Revenue up 11.2% yoy, lower than estimates

For 1QFY2012, Cadila reported net sales of `1,174cr (`1055cr), up 11.2% and below our estimates of `1,280cr, driven by the domestic formulation sales and CRAMS JV. On the export front, Cadila reported overall growth of 15% yoy to `594.3cr (`516.7cr). Overall, US business growth came in lower at 7% to `239.3cr (`222.7cr). Europe and Japan the other key geographies posted growth of 22% and 29%, respectively. The key growth driver for exports was the CRAMS JV, which reported sales of `112.7cr, growth of 149% yoy. During the quarter, the company launched three new ANDAs. With this, the company now has ~130 ANDA filings and 65 approvals. The company plans to file 15 ANDAs in FY2012.
July 20, 2011
Exhibit 3: Sales trend in the US and Europe

320 280 240 200 185 223 226 237 280 239
(`cr)
160 120 80 40 0 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 US Europe 54 63 59 88 66 77
For 1QFY2012, the domestic segment reported growth of 8.9% yoy, with the formulations segment registering growth of 9% yoy. In the consumer healthcare division, Cadila continued to post top-line growth of 4.7% yoy in 1QFY2012. Animal healthcare, on the other hand, grew by 12% yoy. During the quarter, Cadila launched 20 new products, including line extensions in the domestic markets, of which six were launched for the first time.
Exhibit 4: Sales trend in domestic formulation and consumer divisions

500 400 316 300 200 100 0 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 Domestic Formulation Consumer division
436
467 424 387
457
(` cr)
63
87
80
91
77
91
On the CRAMS front, the company generated sales of `112.7cr (`45.3cr), reporting growth of 149% yoy, mainly driven by Hospira JV, which reported sales of `108.4cr (`30cr), up 261% yoy, during the quarter, while Zydus Nycomed declined by 71% yoy.
July 20, 2011
Exhibit 5: Sales trend in the CRAMS segment

160 140 120 100 133 104
(`cr)
80 60 40 20 0 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 Nycomed Hospira 18 22 31 15 14 16 15 37 9 9
OPM drops by 111bp yoy During the quarter, while the companys gross margin remained stagnant at 69.1%, its OPM dropped to 19.6% (20.7%), mainly led by the 34.2% and 26.5% increase in R&D and employee expenses, respectively. With this, Cadila reported R&D expenditure of ~6.7% during 1QFY2012 vs. 5.5% during 1QFY2011.
Exhibit 6: OPM trend

25.0 20.0 19.4 15.0 21.0 19.7 15.7
20.7
19.6
(%)
10.0 5.0 0.0 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012
Adjusted net profit grew by 17.7% yoy: Adjusted net profit increased by 17.7% yoy to `187.4cr (`159.2cr), higher than our estimates of `179cr. However, reported net profit came in at `234.3cr, growth of 15.1%, aided by lower interest expenses and higher other income (of which `44.6cr was contributed by the licensing income from Abbott).
July 20, 2011
Exhibit 7: Net profit trend

200 180 160 140 120 100 80 60 40 20 0 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 Adj. Net
159 119
171
179 162
187
Concall takeaways
Management has re-affirmed its guidance of US$3bn by FY201516, after having achieved the milestone of US$1bn. For its 50:50 JV with Bayer Healthcare, management indicated that the current strength of 500 MRs will be expanded to 800MRs. The JV plans to launch a basket of products in women healthcare, diagnostics, oncology and CVs. Management expects revenue from the Abbott deal to flow in from the next financial year. Further, during the quarter, Cadila added eight new products to the deal. Management expects the resolution of the import alert on its new injectable facility in the next nine months. However, we believe this is unlikely to affect the companys numbers in FY2012, as the facility is unlikely to contribute during the year. Overall, management expects to maintain 20% growth in FY2012.
July 20, 2011
(` cr)
Recommendation rationale
Strong domestic portfolio: Cadila is the fifth largest player in the domestic market with sales of about `2,232cr in FY2011, contributing 49% to its top line. The company enjoys a leadership position in the CVS, GI, women healthcare and respiratory segments, with a sales force of 4,500MRs. The company, on an aggressive front, launched more than 60 new products in FY2011, including line extensions, of which 24 were for the first time. During FY200811, the company reported a 12.2% CAGR in its top line in the domestic formulation business. Going forward, the company expects the segment to grow at above-industry average of 1214% on the back of new product launches and field force expansion. 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, which reported a top-line CAGR of 31.8% to `267.5cr over FY200810. 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 51% to its FY2011 top line. The company has developed a formidable presence in the developed markets of US, Europe (France and Spain) and Japan. In the US, the company achieved critical scale of US$215mn on the sales front in FY2011, primarily driven by market share gains in the US, as some key competitors had manufacturing constraints due to the USFDA issue. In Europe, the companys growth going forward would be driven by new product launches and improvement in margins by product transfer to Indian facilities. In emerging markets, Cadila is aggressively targeting Brazil and the CIS region. One of the most profitable CRAMS players: Cadilas CRAMS JV with Nycomed and Hospira is one of the most profitable in the industry, with OPM of more than 50% and 30%, respectively. Under Nycomed, Cadila expects to commence supply of 14 APIs in the near future. On the Hospira front, where current capacity utilisation is pegged at 1520%, the company expects to scale it up further by tapping the US and European regions.
Outlook and valuation

We expect Cadilas net sales to report a 20.5% CAGR to `6,478cr and EPS to report a 24.8% CAGR to `52.6 over FY201113E. At current levels, the stock is trading at 22.8x FY2012E and 16.8x FY2013E earnings. We maintain Buy on the stock with a revised target price of `1,053.
July 20, 2011
Exhibit 8: One-year forward PE band

800
600
400
200
Dec-06
Apr-05
Aug-08
Apr-10
Jul-06
Mar-08
Oct-07
Feb-06
Nov-09
Sep-05
May-07
6x
12x
18x
24x
Exhibit 9: Recommendation summary

Company Aurobindo Pharma Aventis* Cadila Healthcare Cipla DRL Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Buy Buy Buy Buy Neutral Buy Accumulate Buy Buy Accumulate Neutral CMP Tgt. price (`) 173 2,095 882 317 1,567 89 2,302 450 335 462 240 537 502 (`) 278 1,053 377 1,920 133 658 358 593 373 593 Upside (%) PE (x) 61.2 19.4 18.9 22.5 49.5 46.3 6.8 28.5 55.4 10.3 9.0 23.3 16.8 16.8 16.3 7.6 26.5 6.8 12.2 15.6 6.4 12.0 21.3 FY2013E EV/Sales (x) 1.2 2.9 2.7 3.1 2.8 1.3 6.1 0.9 1.8 2.6 1.4 1.7 5.3 EV/EBITDA (x) 6.8 18.9 13.6 14.5 11.2 7.4 17.3 5.2 8.5 12.9 6.3 7.4 17.1 FY11-13E CAGR in EPS (%) 29.5 15.6 21.6 25.2 22.7 8.6 14.6 25.8 14.8 24.0 29.6 12.2 15.8 FY2013E RoCE (%) 13.8 15.8 27.3 17.0 22.0 7.4 41.0 17.6 23.3 23.9 11.7 26.8 20.2 RoE (%) 19.0 17.1 33.4 18.5 25.2 9.2 30.7 19.3 24.9 30.8 23.4 25.9 20.4
Source: Company, Angel Research #The current estimates are as per IGAAP;* December year ending
July 20, 2011
Feb-11
Sep-10
Jan-09
Jun-09
Jul-11
Profit & Loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& amortisation EBIT % chg (% of Net Sales) Interest & other charges Other income (% of PBT) Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 2,535 108 2,266 57 2,323 27.0 1,865 790 112 247 715 401 30.0 17.7 97 304 34.4 13.4 41 10 3 330 20.6 7 323 61.3 19.0 262 4.5 258 265 13.1 11.4 12.6 12.6 10.2 FY2009 2,917 55 2,862 65 2,928 26.0 2,322 957 122 311 933 541 34.7 18.9 112 429 40.9 15.0 121 20 5 394 19.3 24 370 66.6 18.0 303 (0.1) 303 327 23.8 10.6 14.8 14.8 17.5 FY2010 3,614 40 3,574 113 3,687 25.9 2,716 1,178 150 393 1,145 858 58.6 24.0 134 724 68.8 20.3 82 16 2 770 95.6 5 766 74.1 9.7 692 24.7 667 672 105.1 18.7 24.7 24.7 66.8 FY2011 FY2012E FY2013E 4,521 56 4,465 166 4,630 25.6 3,622 1,475 162 609 1,538 842 -1.8 18.9 127 715 -1.2 16.0 70 13 2 824 7.0 824 106.4 12.9 718 25.1 693 693 3.1 15.5 33.8 33.8 36.8 5,401 65 5,336 127 5,462 18.0 4,277 1,836 331 720 1,390 1,059 25.7 19.8 142 917 28.1 17.2 69 27 3 1,001 21.5 1,001 194.6 19.4 807 16.1 791 791 14.2 14.8 38.6 38.6 14.2 6,554 76 6,478 150 6,627 21.3 5,168 2,229 402 874 1,663 1,310 23.7 20.2 158 1,152 25.7 17.8 54 45 4 1,293 29.1 1,293 198.7 15.4 1,094 16.4 1,078 1,078 36.4 16.6 52.6 52.6 36.3
July 20, 2011
Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & Surplus Shareholders funds Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital Work-in-Progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net Current assets Mis. Exp. not written off Total assets 1,627 652 975 140 285 25 1,122 93 201 828 505 617 2,043 1,809 757 1,052 189 478 25 1,561 252 224 1,086 692 870 2,613 2,074 873 1,201 248 484 21 1,775 251 307 1,217 866 909 10 2,872 2,528 996 1,532 248 484 21 2,283 295 411 1,577 1,119 1,164 3,449 2,657 1,138 1,519 248 484 26 2,996 442 427 2,127 1,474 1,522 3,799 2,985 1,296 1,689 248 484 26 3,998 899 518 2,581 1,815 2,183 1 4,632 63 999 1,062 19 838 123 2,043 68 1,123 1,191 23 1,267 132 2,613 68 1,560 1,629 39 1,091 114 2,872 102 2,069 2,171 67 1,097 113 3,449 102 2,721 2,824 83 735 157 3,799 102 3,521 3,624 99 735 173 4,632 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E
July 20, 2011
Cash Flow Statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 323 97 (212) 10 40 159 (493) (1) 10 (483) 384 (84) 18 318 (6) 99 93 370 112 (121) 20 49 291 (388) (1) 20 (368) 421 (71) (114) 236 159 93 252 604 134 (124) 16 77 521 (299) (84) 16 (368) (177) 75 406 305 458 252 251 FY2011 FY2012E FY2013E 824 127 (211) 13 106 621 (291) (0) 13 (278) 7 (176) (118) (287) 56 251 295 1,001 142 (211) 27 150 756 (292) 6 27 (260) (363) (198) (11) (572) (76) 295 442 1,293 158 (204) 45 182 1,019 (328) 45 (283) (269) (10) (279) 457 442 899
July 20, 2011
10
Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.7 1.9 7.4 0.9 1.9 3.6 0.5 1.0 8.8 0.4 1.0 10.2 0.1 0.3 13.3 (0.0) (0.1) 21.5 1.6 68 50 73 68 1.7 67 52 70 71 1.9 67 47 77 63 2.0 62 49 76 60 2.1 66 57 89 65 2.3 72 58 93 65 17.4 22.5 27.4 18.4 26.6 29.1 26.4 40.4 47.6 22.6 33.2 36.5 25.3 36.3 31.7 27.3 41.0 33.4 13.4 81.0 1.4 15.3 5.2 0.6 21.0 15.0 82.0 1.4 16.7 9.4 0.8 22.3 20.3 90.3 1.5 27.1 6.3 0.7 41.3 16.0 87.1 1.6 22.4 5.6 0.4 29.8 17.2 80.6 1.7 23.2 6.0 0.2 27.3 17.8 84.6 1.9 28.1 6.2 0.0 28.8 12.6 12.6 17.3 2.8 52.0 14.8 14.8 20.3 3.0 58.3 24.7 24.7 39.2 5.0 79.7 33.8 33.8 40.0 7.4 106.1 38.6 38.6 45.6 8.3 137.9 52.6 52.6 60.4 11.2 177.0 70.0 50.8 17.0 0.3 8.3 46.8 9.2 59.5 43.4 15.1 0.3 6.7 35.2 7.3 35.7 22.5 11.1 0.6 5.3 22.0 6.6 26.1 22.0 8.3 0.8 4.2 22.4 5.5 22.8 19.4 6.4 0.9 3.4 17.3 4.8 16.8 14.6 5.0 1.3 2.8 13.7 3.9 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E
July 20, 2011
11
Research Team Tel: 022 - 39357800
E-mail: research@angelbroking.com
Website: www.angelbroking.com
DISCLAIMER
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Cadila No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
Buy (> 15%) Reduce (-5% to 15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
July 20, 2011
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1QFY2012 Result Update | Pharmaceutical

July 20, 2011

Source: Company, Angel Research

Abs.(%) Sensex Cadila

Key financials (Consolidated)

Sarabjit Kour Nangra

Please refer to important disclosures at the end of this report