Cadila Healthcare's Q2FY19 results (Outperformer) - US disappoints; operationally inline

Q2FY19 result highlights

• Cons revs at Rs28.4bn (+3% qoq; -10% yoy) below our est of Rs29.5b led by lower revenues from US at $188m vs est of $200m ($183mn in Q1).India revs were marginally below at Rs8.9bn(flat yoy) vs est of Rs8.8bn while EMs were higher at Rs2bn (+4% qoq) vs est Rs1.95bn
• Despite lower high margin US sales, GMs came higher at 66.1% (64.4% in Q1) vs est 65.4% aided by forex gain of Rs118mn. However, SGA came higher at Rs7.6bn (+3% qoq) vs est of Rs7.57bn with higher R&D exp of Rs2.7bn (+49% qoq).
• Aided by other operating income of Rs1.2bn (incl Rs463mn of forex) vs est of Rs800mn, EBITDA came broadly inline at Rs6.9bn vs est of Rs7bn; Margins at 23.2% vs (22.3% in Q1) est 23.1%. Cadila has booked Rs581mn  (Rs750mn in Q1) of forex gains above EBITDA
• Tax rate stood lower at 23.3% vs est of 25%. Int cost stood higher at Rs357mn vs est of Rs250mn. Reported PAT of Rs4.18bn vs est of Rs4.2bn.
• Cadila has launched own gAsacol HD, gToprol during August and Androgel AG ($1bn market size). Mgt guided to ~30 new product launches in H2 (22 in H1). Overall, with soft H1, mgt has lowered its guidance for FY19 US sales flat over FY18 vs earlier guidance of higher sales.

Key positives: Lower empl cost, higher other opt income; better GMs

Key negatives: Lower US sales sequentially

Impact on financials: We reduce our FY19/20 earnings est by 5%/6%

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$908m over by FY20E. Mgt guidance is well ahead of these estimates. This combined with improving domestic formulations business will drive 8% CAGR in PAT over FY18-20E with RoCE/RoE (FY20E) of 17%/19%. 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 Rs422.