Cadila Healthcare's Q1FY19 results (Outperformer) - US disappoints; Guides to sharp H2 pickup

Q1FY19 result highlights

• Cons revs were down 12% qoq to Rs27.7bn below our est of Rs30.1b led by lower revenues from US at $183m vs est of $220m ($255mn in Q4). The qoq drop is likely due to drop in gTamiflu sales and increased competition in gLialda. India revs were inline at Rs8.9bn(+40% yoy)
• With lower high margin US sales, GMs came lower at 64.4% (66.5% in Q4) vs est 66%. However, SGA came lower at Rs7.4bn (-9% qoq) vs est of Rs8.1bn with flat R&D expenses. Staff cost came in higher at Rs5.3bn vs est of Rs5.06bn. There were Rs750m forex benefits in EBITDA.
• Despite other operating income of Rs1.25bn, EBITDA came sharply lower at Rs6.45bn below est of Rs7.4bn; Margins at 22.3 vs est 24.1%.
• Tax rate stood lower at 21.1% vs est of 22%. Other income at Rs1bn vs est of Rs200mn aided by ~Rs796m gain on investments. Reported PAT of Rs4.6bn (-24% qoq) was lower vs est of Rs4.8bn.
• Cadila has launched own gAsacol HD and gToprol during August. Mgt guided to ~50 new product launches (9 in Q1) in FY19. Expect multiple other ER products to be launched going forward. Overall, despite soft Q1, mgt continues to guide for FY19 US sales > steep FY18 base ($906m).
• Cadila is acquiring 51% stake in Windlass Healthcare with an intent to enhance its manufacturing capacities as it prepares to commercialize significantly large no of new ANDAs over next 2 years or so.

Key positives: Lower SG&A cost, higher other income

Key negatives: Sharply lower US sales sequentially

Impact on financials: We reduce our FY19/20 earnings est by 5% each

Valuations & view

Cadila has begun to leverage the R&D investments made over the past several years as reflected in the receipt of a phenomenal ~80 ANDAs over the last 15m or so including final approvals for gLialda, gAsacol HD, gTamiflu, gToprol etc. With guidance of ~50 new product launches in FY19 and another ~144 ANDAs pending approval, including a fair mix of complex/niche presentations such as transdermals, nasal sprays, etc., Cadila’s US business is on a pretty solid footing. We estimate Cadila’s US sales will grow to US$940m over by FY20E. Mgt guidance is well ahead of these estimates. This combined with improving domestic formulations business will drive 11% CAGR in PAT over FY18-20E with RoCE/RoE (FY20E) of 18%/20%. In the near term, Cadila’s ability to deliver on its guidance of growing its US sales over the high FY18 base remains key. We maintain Outperformer rating with a target price of Rs429.