Cadila Healthcare's Q4FY19 results (Neutral) - Inline quarter

Q4FY19 result highlights

• Cons revs at Rs37.3bn (+24%/11% yoy/qoq) were above our est of Rs34b primarily due to consolidation of Heinz acquisition for 2 months. Revenues from US at $256m vs est of $252m ($268mn in Q3). Domestic formulations sales stood at Rs9bn (2% yoy) vs est Rs8.5bn; Q3 was Rs8.5bn;
• GMs came higher at 62.4% (61.2% in Q3) vs est 61.4% likely due to better base business profitability. SGA came sharply higher at Rs9.9bn (+15% qoq) vs est of Rs8bn due to inclusion of Heinz portfolio as well as one-time exp of Rs350mn owing to setting up of WB plant and political donations.
• EBITDA came lower at Rs8bn (Rs8.4bn in Q3) vs est of Rs8.2bn
• Interest cost was high at Rs773mn (est Rs438mn) while tax rate came low at 20.9% vs est of 23.8%. PAT stood lower at Rs4.6bn vs est of Rs4.7bn.
• India – Business is expected to normalize from Q1FY20 onwards. Aim to grow 1.25x market growth from thereon over the next 5 years.
• US –Guides to 35-40 launches in FY20 (excluding approvals. launches from Moraiya). Guides to single digit growth in US generics business despite challenges in Moraiya.
• Net debt: Post Heinz acquisition – Rs70.2bn.

Key positives: Higher domestic sales

Key negatives: Sharp increase in SGA; higher interest costs

Impact on financials: We reduce our FY20/21 earnings est by 10.5%/6.9% to account for lower US sales

Valuations & view

While Cadila has ended FY19 on a reasonably strong note, the future growth outlook remains challenging given the growth challenges in the US market across both generic and branded business segments. Post the issuance of 14 observations in the recent FDA inspection, new ANDA approvals from Moraiya unit seem unlikely. Despite mgt guidance of 35-40 new launches in FY20, we think that Cadila will struggle to mitigate the significant erosion in big ticket products like gLialda and gAndrogel AG with the expanded fixed cost base enhancing earnings sensitivity. Domestic business restructuring has added volatility to the growth outlook of this segment for the near term. Additionally, the balance sheet is significantly levered post the Heinz India business acquisition. Given US growth issues, we estimate flat earnings over FY19-21e. While the stock has corrected sharply over last few months, we see limited upsides given the muted growth outlook and stretched balance sheet. Maintain Neutral rating with a TP of Rs299 (16x FY21E EPS). Clarity on Moraiya unit compliance status will be key trigger for upgrade.