Buy This Large Cap Pharma Stock For 17% Upside In 6 Months: HDFC Securities

 

Q2 FY22 results of Cadila Healthcare Ltd

HDFC Securities has said today in its research report that "Revenue for the quarter grew 3.4% YoY at Rs 3785cr. EBITDA margin improved 50bps YoY at 22.7%. Margin improved due to lower other expenses. Cadila reported a net profit of Rs 3002.3cr which included a one-off gain of Rs 2681cr due to the sale of animal health business. The company had a one-off exceptional loss of 95.7cr in the quarter as well. Adjusted net profit came in at Rs 597cr. Gross Margin (GM) declined 190 bps YoY (240bps QoQ) to 63.5% in Q2FY22 vs. 65.8% in Q1FY22 vs. 65.4% in Q2FY21. Net profit from continued operations grew 7% YoY (-13.8% QoQ) to Rs 506cr."

According to the brokerage "India business which includes human formulations and consumer wellness business (43% of consolidated revenue) during the quarter, witnessed a healthy growth of 12% on a YoY basis and registered sales of Rs 1591cr during the quarter. US business grew 3% QoQ, however, declined 12% YoY at Rs 1498cr. Emerging Markets (EM) revenue registered strong 48% YoY and 26% QoQ growth at Rs 349cr. The human health formulations business grew 12% while the consumer wellness business grew by 13% during the quarter. Excluding the institutional sales of COVID products, human health formulations business increased 17%. It has significantly strengthened its balance sheet; net debt has fallen to Rs 400cr (vs. Rs 1000cr QoQ; vs. Rs 3500cr as of Mar-21). Research & Development (R&D) expenses stood at Rs 224cr or 5.9% of revenue. The company filed 13 ANDAs in H1FY22 and received final approval for 9 products in H1FY22. During the quarter, the company received approval for the world's first Plasmid DNA vaccine for COVID-19, ZyCoV-D. The company also received approval from the DCGI to conduct Phase III trials for the two-dose regimen of the vaccine."

H1FY22 result highlights of Cadila Healthcare Ltd

HDFC Securities has highlighted in its research report that "Consolidated revenue grew 4% YoY in the H1FY22, supported by growth in the domestic and emerging markets while US revenue witnessed degrowth. US business (~43% of revenue) degrew by 11% in the first half of FY22 due to continued intense pricing pressure and lack of new key launches. The delayed regulatory re-inspection and closure of the US FDA warning letter at the group's plant in Moraiya (Gujarat) restricted new product launches in the US market. The resolution of pending regulatory issues at the Moraiya plant and pick-up in new product launches resulting in strong revenue growth in the US market would remain the key monitorables. The company launched 7 new products in the US market."

According to the research report of the brokerage "Domestic formulations segment (27% of revenue) is expected to witness healthy growth in FY22, given the revival in demand and lower base of previous fiscal. In August 2021, India's drug regulator granted emergency use approval for Cadila's Covid-19 vaccine, ZyCoV-D. The Covid-19 vaccine sales could provide upside to the overall domestic market sales and would remain the key monitorable. Operating margin stood at 22% in FY21 and is expected to remain healthy at 21-22% over the medium term, supported by cost control measures and ability to pass on the majority of input cost increase to customers."

Concall highlights of Cadila Healthcare Ltd according to the brokerage

• The company launched three new products including complex injectable namely Enoxaparin sodium injection, and an in-licensed product, which is the second in-licensed complex injectable product.
• The company has been progressing well on its zero-based budgeting approach of cost savings for the Human Health formulations business in India and is likely to yield margin expansion in the range of 80-100bps from CY22.
• Excluding the impact of inventory provision taken up by the company for COVID-19 products, the company's EBITDA margin increased to 23.8% vs. 22.7%.
• Net debt stood at Rs 400cr as of Q2FY22 compared to Rs 3500cr as of Q4FY21, resulting in the net debt to EBITDA ratio coming down to 0.1x as of Q2FY22 from 1.1x as of Q4FY21.
• In Sep-2021, the company entered into an agreement with Shilpa Medicare for the production and supply of ZyCOV-D vaccine from its manufacturing facility.
• Company guides for flat sales in the US markets in Q3FY22 and likely fall in Q4FY22 due to increased competitive pressures in the US. Cadila intends to launch around 50 products in the US in CY22.
• Vaccines are expected to become US$ 250mn business by FY25/FY26 vs. US$ 10-15mn.

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Buy Cadila Healthcare Ltd Says HDFC Securities

According to the brokerage "Management has guided for > US$ 250 mn sales each for injectables and vaccines segment in the next 3 years. The company has received Emergency Use Authorisation (EUA) for ZyCoV-D and plans to manufacture around 1cr doses per month. Due to the continued emergence of new variants such as Omicron, the company's vaccine sales are expected to gain momentum in the medium term. In Nov-2021, the company received an order from the Indian government for the supply of 10 mn doses of ZyCoV-D at Rs 358 per dose including Rs 93 for the needle-free applicator. The company has agreed to provide a manufacturing license and transfer Plasmid DNA vaccine technology to Enzychem Lifesciences, Republic of Korea. Cadila continues to grow in high-teens (ex-Covid) led by new launches, volume growth, and market share gains in key therapeutic areas in the domestic formulation segment."

HDFC Securities has noted that "On Oct-19, 2020, we had initiated coverage on Cadila Healthcare at Rs 430.5 for base case target of Rs 457 and bull case target of Rs 497. On Jan 28, 2021, we had issued a stock update note at Rs 464 with a target price of Rs 543. After that, the stock hit a high of Rs 673 in Jun-2021. Cadila has corrected around 30% from its peak. This provides an attractive entry point with favourable risk-reward. Healthy ANDA filing and launch momentum, injectables business, innovative pipeline, and in-licensing deals, strong domestic business outlook and vaccine business ramp-up are some of the key positives."

The brokerage has claimed in its research report that "Launch of injectables and niche low competition launches are the future building blocks for the US business. Cadila's material capital allocation in transdermals, vaccines, NCEs and biosimilars would lead to healthy earnings growth over the next 2-3 years. Domestic formulations and consumer wellness businesses should grow in high single digits and low-mid-teens, respectively over FY21-24E. We estimate 6% revenue CAGR led by strong in domestic formulation, consumer wellness and EM business. We have an estimated margin in the 21-23% range over this period. We expect adjusted PAT to register 9% PAT CAGR on the back of steady margin and lower interest expenses over FY21-24E (due to high base in FY21). US business is expected to remain almost flat over the same period. Investors can buy the stock at LTP and add further on dips to Rs 410 (16x Dec-2023E EPS) for a base case fair value of Rs 513 (20x Dec-2023E EPS) and a bull case fair value of Rs 551 (21.5x Dec-2023E EPS) over the next two quarters."