Cadila Healthcare's Q1FY20 results (Neutral) - Soft quarter; muted near termoutlook

Q1FY20 result highlights

• Cons revs at Rs35bn (+23%/-6% yoy/qoq) were in line with est. While US was a miss ($197m vs est of $210m; $256m in Q4), erstwhile Heinz biz revenues were sharply ahead of estimates at Rs4.6bn vs Rs2.9bn. Mgt cited that this business typically clocks 1/3^rd of annual rev in Q1. Domestic formulations stood at Rs9.5bn inline with est; 6.2% yoy.
• EBITDA came lower at Rs6.3bn (Rs8bn in Q4) vs est of Rs7.4bn.  Mgt cited Rs700m of multiple one-offs; Adj EBITDA was still lower than est.
• GMs came at 63% (62.4% in Q4) inline with est. SGA came sharply higher at Rs10.2bn (+2% qoq) vs est of Rs9.2bn due to one–off charges and higher costs related to Heinz. 
• PAT stood lower at Rs3bn vs est of Rs3.8bn.
• US – Guides to 25 more launches in FY20 and single digit growth in generic business (adj for gAndrogel and branded business revs in FY19). 32 ANDAs pending approval at Moraiya which will get impacted by recent OAI. Company aims to finish remedial action by Q3FY20.
• Positive on domestic business post business gradually picking up momentum through the quarters post restructuring. Trade generic business (8-10% of revs) has been under pressure.
• Net debt: Post Heinz acquisition – Rs63.2bn vs Rs70.2bn in Q4.

Key positives: Higher consumer product sales 

Key negatives: Lower US sales; sharp increase in SGA; higher interest costs

Impact on financials: We reduce our FY20/21 earnings est by 12% / 8% to account for lower US sales and higher costs.

Valuations & view

Cadila’s near term growth outlook remains challenging given the growth challenges in the US market across both generic and branded business segments. Post the OAI classification of the recent FDA inspection, new ANDA approvals from Moraiya unit will get delayed. Despite mgt guidance of 25 new launches in FY20, we think that Cadila will struggle to mitigate the significant erosion in big ticket products like Levorphanol, gLialda and gAndrogel AG with the expanded fixed cost base enhancing earnings sensitivity. Domestic business restructuring has added volatility to the near term growth outlook of this segment. Additionally, the balance sheet is significantly levered post the Heinz India business acquisition. While the stock has corrected sharply over last few months, we see limited upsides given the muted near term growth outlook with downside risks and stretched balance sheet. Maintain Neutral rating with a TP of Rs259 (15x FY21E EPS).