Cadila Healthcare's Q3FY18 results (Outperformer) - In-line; Higher “other expenses” disappoint

Q3FY18 result highlights

• Cons revs were up 39% yoy to Rs31.9bn above our est of Rs30.5b led by higher revenues from US at $246m vs est of $240m likely driven by higher gLialda and Tamiflu supplies. India revenues came in higher at Rs9.2bn (+15% yoy; +22% yoy like to like) vs est of 8%.  
• GMs at 65.6% (65.9% in Q2) came in better than est af 63.5% led by larger component of higher margin US sales. However, SGA came sharply higher at Rs8.3bn (+31% qoq) vs est of Rs7.7bn despite lower R&D exp of Rs2.07bn (-25% qoq). Sharp escalation in SGA expenses has been a key negative surprise for the past two quarters. This has significantly nullified the gains from the higher revenues.
• Consequently EBITDA came at Rs7.7bn (+126% yoy) in line with lower margins at 24.2% (24.7% in Q2) vs est 25.7%.
• Depreciation came at Rs1.47bn vs est Rs1.3 and tax rate stood higher at 24.9% vs est of 23%. Other income beat est. Consequently reported PAT of Rs5.4bn (+92% yoy), in line with our est of Rs5.3bn.

Key positives: Higher US and India sales; better GMs

Key negatives: Higher other expenses, higher depreciation and tax rate

Impact on financials: We have reduced our FY19 earnings by 12% to factor higher “Other expenses” and have introduced FY20 estimates.

Valuations & view

Cadila is beginning to leverage the R&D investments made over the past several years post the resolution of its primary FDA challenge, with the receipt of EIR for its key Moraiya facility. The receipt of ~30+ approvals YTD including the final approval for gLialda and gTamiflu, reflect improving momentum in the US business. With another ~170 ANDAs pending approval, including a fair mix of complex/niche presentations such as transdermals, nasal sprays, etc., we estimate Cadila’s US sales will grow to US$943m over by FY20E. This combined with improving domestic formulations business will drive 15% CAGR in PAT over FY18-20E with RoCE/RoE (FY20E) of 19%/21%. Accelerated niche generic launches can provide upsides to these projections. We maintain Outperformer rating and a target price of Rs465.