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MOSL: CADILA HEALTH (Buy)-US sales moderate-Branded formulation growth revives

Cadila Health: US sales moderate; Branded formulation growth revives

(CDH IN, Mkt Cap USD3.3b, CMP INR230, TP INR275, 19% Upside, Buy)

 

• Addition in Consumer Wellness segment (Heinz portfolio) leads revenue growth: 1QFY20 sales at INR35b (v/s est. of INR36.6b) were up 20.8% YoY, largely led by the Consumer Wellness business (sales at INR6b YoY v/s INR1.4b last year). US sales at INR13.7b (40% of sales) were up 11.2% YoY. India formulations grew 6.2% YoY to INR9.5b (28% of sales). EM formulation sales grew 12.3% YoY to INR2.2b. Growth was mainly dragged by Europe formulations (INR474m, -23.4% YoY), API business (INR692m,-36.8% YoY) and Animal Health business (INR1.2b,-3.6% YoY).
• Inferior product mix affects profitability: Gross margin stood at 64% and contracted 190bp YoY on the high base of the past year. There was a one-time expense of INR700m related to stamp duty, consultancy fees and donation this quarter. Adjusting for it, EBITDA margin came in at 20.1% (in-line), down 220bp YoY, affected by GM contracting and higher R&D/other expenses (+80bp YoY as % of sales). Adj.EBITDA at INR7b (v/s est. of INR7.4b) was up 8.8% YoY. Adj. PAT at INR3.6b (v/s est. of INR4.3b) declined 22% YoY due to higher depreciation and lower other income.
• Key Con-call highlights: (1) The USD55m QoQ decline in US sales is largely due to (a) sharp reduction in Authorised generics (AG) sales of g-Androgel, and (b) seasonality related to g-Tamiflu sales, and (c) regulatory issues at Moraiya. (2) Adjusting for AG and specialty sales, CDH's US sales were ~USD800m for FY19. (3) CDH has guided for single-digit growth in US generics for FY20. (4) Company would be completing work related to cross contamination issue by 2QFY20. (5) Net debt remains at elevated level of INR63b at the end of 1QFY20.
• Valuation & view: We cut our EPS estimate by 7%/6% for FY20/FY21 to factor in the impact of regulatory issues at Moraiya and increased competition in select products for the US market. We continue to value CDH at 15x 12M forward earnings to arrive at PT of INR275 (prior: INR290). The course correction in the India business has already started to show benefits. Additionally, CDH's ANDA pipeline too remains strong for the US market. While, the high base of the past year and regulatory issues are expected to lead to an earnings decline in FY20, we maintain Buy as CDH has seen substantial PE de-rating from 30x (2 years back) to 14x FY20/13x FY21, thus available at attractive valuation.