Cadila Healthcare's Q3FY20 results (Neutral) - US surprise

Q3FY20 result highlights

• Cons revs at Rs36.4bn (1% yoy) were above est of Rs34bn. Domestic formulations stood below est at Rs9.1bn; 7.6% yoy.
• Key surprise was the beat in US business which grew strongly sequentially and stood at $235m ($206m in Q2) vs est of $215m. Mgt indicated that during the quarter, price erosion of its base portfolio stood at 1.8%; new product launches contributed 1% growth and rest of the growth was driven by volumes / gTamiflu seasonality impact.
• EBITDA came lower at Rs6.9bn (Rs6.3bn in Q2) vs est of Rs6.4bn. GMs came at 64.8% (64.4% in Q2) vs est of 64.5%. SGA came higher at Rs10.8bn (9.5% qoq) vs est of Rs9.8bn due to higher costs related to Heinz.  
• Reported PAT stood lower at Rs3.8bn vs est of Rs3.3bn. Tax rate for the quarter stood at 20.2% vs est of 21%
• US – Guides to 30 launches in FY21. 34 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.
• Net debt: Rs65.3bn vs Rs69.9bn at the end of FY19.

Key positives: Stabilization in US base portfolio sales

Key negatives: Sharp increase in SGA

Impact on financials: We raise our FY20/21 earnings est by 4% each to account for higher US sales and faster recovery in Indian business.

Valuations & view

Given couple of quarters of sluggish growth and uncertain outlook, strong QoQ growth in Cadila’s US sales in Q3 has been a positive surprise. While seasonality has played a role, management remains positive on sustaining this base and growing further as it gains from new product launches as well as emerging opportunities in US for generic players with a broad marketed portfolio. Combined with recovery in Indian business, this stabilization of US sales bodes well for Cadila. On the flipside, we estimate that gAsacol HD continues to account for ~20% of Cadila’s EBITDA and potential entry of incremental generic competition from FY22 will significantly erode high margin US sales thereby restricting profitability growth over FY20-22E. Given muted profitability growth over FY19-22e and a significantly levered balance sheet, valuations are fair at 14x FY22E EPS. Maintain Neutral with a price target of Rs297 (16x FY22E EPS). Visibility on further uptick in US sales will be triggers for upgrade.