MOSL: CADILA HEALTH (Buy)-US de-grows sequentially, but outlook promising

Cadila Health: US de-grows sequentially, but outlook promising

(CDH IN, Mkt Cap USD5.2b, CMP INR355, TP INR440, 24% Upside, Buy)

• Performance strong YoY but affected sequentially by lower US sales: CDH's revenue grew 32% YoY to INR29b (our estimate: INR33b), led by growth of 40% YoY in Domestic formulation (DF, 32% of sales) and 27% YoY in US sales (44% of sales). Gross margin improved ~370bp YoY to 65.9%, led by a change in the product mix, partly offset by higher raw material cost. EBITDA margin improved ~970bp YoY to 22.3% (our estimate: 24.5%). Accordingly, EBITDA increased ~133% YoY to INR6.5b (our estimate: INR8b). PAT grew at a higher rate of ~233% YoY to INR4.6b (our estimate: INR5.1b), driven by higher other income. Sequentially, revenue and PAT declined 11% and 24%, respectively, largely due to lower US sales (-26% to USD186m). Seasonality impacted key product sales in the US market, dragging overall profitability.
• Other key highlights: Price erosion in the US base business was to the tune of 2-3% QoQ. Though US sales were lower for the quarter, CDH is confident of exceeding FY18 US sales of USD~900m in the current year, led by strong product launches and increased traction in existing products. CDH launched g-Asacol from its in-house manufacturing facility, which would improve the operating margin of the product. Moreover, CDH has launched g-Toprol recently. The company also bought a 51% stake in Windlass Healthcare for INR1.6b, which would expand manufacturing capacity for oral solids in the US market. R&D expense stood at INR1.9b, 6.5% of net sales. CDH incurred capex of INR2.8b in 1QFY19. Net debt was at INR30b at end-1QFY19.