Cadila Healthcare's Q2FY18 results (Outperformer) - Strong quarter; Higher other expenses disappoint

Q2FY18 result highlights

• Cons revs were up 32% yoy to Rs31.55bn above our est of Rs28.2b led by higher revenues from US at $255m vs est of $200m driven by higher gLialda (likely at ~$70-75m vs est of $45-50m). India revenues came at Rs8.9bn (+9% yoy; +15% yoy like to like) in line with est. EMs +16% yoy at Rs1.3bn (inline with est) while JVs were -6% yoy.   
• GMs at 65.9% (62.9% in Q1) were in line despite higher than expected gLialda sales. However, SGA came sharply higher at Rs8.2bn (+18% qoq) vs est of Rs7.5bn led by higher R&D exp of Rs2.8bn (+35% qoq) and higher marketing spends. This was a key negative surprise.
• EBITDA came at Rs7.8bn (+56% yoy) vs est of Rs6.5bn with margins at 24.7% (10% in Q1) vs est 23.1%.
• Interest cost stood higher at Rs406mn (+85% qoq) and tax rate stood higher at 29.8% (19% in Q1) vs est of 16%.  Consequently reported PAT of Rs5.03bn (+49% yoy), was above est our est of Rs4.7bn.

Key positives: Higher US sales

Key negatives: Higher other expenses, higher interest cost and tax rate; increase in tax rate guidance

Impact on financials: We have reduced our FY18/19 earnings by 23% / 18% to factor higher other expenses, higher depreciation and taxes.

Valuations & view

Cadila is poised to leverage its R&D investments made over the past several years as the company has resolved its primary FDA challenge with the receipt of EIR for its key Moraiya facility. The receipt of ~28 approvals YTD (10+ approvals in FY17), including the final approval for gLialda, reflect significant pick-up in the US business. With another ~170 ANDAs pending approval, including a fair mix of complex/niche presentations such as transdermals, nasal sprays, etc., we estimate Cadila’s US sales will post a 25% CAGR to US$884m over FY17-19E. We estimate Cadila will report 34%/23% CAGR in EBITDA/PAT, respectively, over FY17-19E and RoCE/RoE (FY19E) of 21%/24%. Any accelerated approvals for niche generics can provide upside to these estimates. We maintain Outperformer rating and a target price of Rs484.