Cadila Healthcare's Q2FY20 results (Neutral) - Below estimates; miss largely due to Zydus Wellness

Q2FY20 result highlights

• Cons revs at Rs32.4bn (14% yoy) were below est of Rs34.3bn. While US was inline ($206m; $197m in Q1), consumer business was sharply lower at Rs3.2bn vs est of Rs4.8bn. Mgt cited that acquired Heinz business typically clocks 60% of annual rev in H1. Domestic formulations stood inline at Rs9.8bn; 9.5% yoy.
• EBITDA came lower at Rs6.3bn (Rs6.3bn in Q1) vs est of Rs7.1bn.  Mgt cited Rs120m of one-offs; Adj EBITDA was still lower than est.
• GMs came at 64.4% (63% in Q1) vs est of 63%. SGA came higher at Rs9.9bn (-2.7% qoq) vs est of Rs9.5bn due to higher costs related to Heinz. 
• Reported PAT stood lower at Rs1.1bn vs est of Rs3.6bn. Cadila recorded an exceptional expense of Rs2.7bn related to an impairment charge recorded in intangibles on account of increased competitive intensity in Levorphanol
• US – Guides to 15 more launches in FY20 and high 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 WL. Company aims to finish remedial action by Q1FY21.
• Positive on domestic business gradually picking up momentum through the quarters post restructuring. Trade generic business (8-10% of revs) has been under pressure.
• Net debt: Rs66.9bn vs Rs69.9bn at the end of FY19.

Key positives: Stabilization in US base portfolio sales

Key negatives: Lower consumer product sales; sharp increase in SGA;

Impact on financials: We reduce our FY20/21 earnings est by 4% / 7% to account for lower consumer business 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 WL classification of the recent FDA inspection, new ANDA approvals from Moraiya unit will get delayed. Despite mgt guidance of 30 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 (16x FY21E EPS).