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MOSL: CADILA HEALTH (Buy)-Traction improves in US sales-Consumer wellness drags profitability

CADILA HEALTH: Traction improves in US sales; Consumer wellness drags profitability

(CDH IN, Mkt Cap USD3.2b, CMP INR225, TP INR265, 18% Upside, Buy)

 

• Addition in Consumer Wellness segment (Heinz portfolio) leads revenue growth: 2QFY20 sales at INR33.6b (in-line) were up 13.7% YoY, largely led by the Consumer Wellness business (sales at INR3.2b YoY v/s INR1.4b last year). API business also supported growth to some extent (+17.9% YoY to INR1b). India formulations grew 10.4% YoY to INR9.8b (30% of sales) for the quarter. US sales at INR14.5b (45% of sales) were up 9.7% YoY. EM sales grew 7.6% YoY to INR2.2b. Growth was mainly dragged by Europe/JV business, down 21.7%/93.8% YoY to INR407m/INR15m. Animal Health business also remained muted at INR1.3b.
• Higher opex leads margin decline: Gross margin stood at 65.6% and contracted 90bp YoY on high base of the past year. On sequential basis, GM improved 160bp. EBITDA margin came in at 18.6% (v/s est. 20.6%) and contracted 460bp YoY/150bp QoQ. This was largely due to change in the product mix and higher other expenses as % of sales (+490bp YoY), offsetting lower R&D expense (-130bp YoY) as % of sales. Other expense was higher largely due to increased operational spends in consumer wellness and India formulations. EBITDA came in at INR6.3b (v/s est. INR6.9b) and was down 9% YoY. Adjusting for one-time impairment charges of INR2.7b pertaining to increased competition to Levarphanol, Adj. PAT came in at INR3.3b (v/s est. INR3.8b), down 20% YoY.
• For 1HFY20, revenue/EBITDA/PAT grew +17%/-0.4%/-21% YoY to INR68.6b/ INR13.3b/INR7b.