Cadila Healthcare Ltd IC 130910

8/6/2019 Cadila Healthcare Ltd IC 130910

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Cadila Healthcare Ltd



Initiating Coverage Cadila Healthcare Ltd.

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Recommendation BUY SnapshotHeadquartered in Ahmedabad, Cadila Healthcare Limited (CDis research oriented pharmaceutical company. It has presencacross the Pharma value chain having operations from API formulations to research & development. Cadila is 5th largeplayer in the Indian formulations market.

Investment Rationale

Robust Export Growth: Export formulations is currentcontributing ~40% of sales but expected to grow faster thathe company average. We expect it to grow at a CAGR of 29for next two years and to contribute ~44% to FY12revenues.

Strong Domestic Presence: Cadila is a strong player domestic formulations. Its domestic business till now henabled the company to take risks by venturing into newregions, trying therapeutic segments etc. We rate domest

segments as a CASH COW for the company having stabmarket share and steady margins.

Niche Area Approach: Company is making foray into nichsegments which have high growth potential liTransdermal, Pulmonary, Topical etc together having markopportunity of $180 bn in near to mid-term.

Consumer Healthcare: Cadila has strong brands liEverYuth, SugarFree, Nutralite under its separated listesubsidiary – Zydus Wellness.

Strategic Partnership In Form Of JVs: Cadila has done somJVs with renowned players like Hospira, Nycomed, BharSerum. It provides revenues visibility and learning forexperience of such players which reduces risk for thcompany. Together they are contributing ~5% to revenues.

Valuation & RecommendationWe believe that the company has done the groundwork and hamade investments in right direction like acquisitions done enter new regions and business segments and now it is the rigtime to enjoy the fruits of all those efforts. We believe thaCadila should be valued on a PE multiple of 20x. Based on oEPS of Rs. 39.5 for FY12E and a target multiple of 20x we arrivat target of Rs. 790. Consequently, we initiate with a BUY ratinon the stock with a target price of Rs. 790, indicating a potentiupside of 28.7%.

CMP ( 13th Sept 2010) Rs. 614

Sector Pharmaceuticals

Stock Details

BSE Code

NSE Code

Bloomberg Code

Market Cap (Rs. cr)

Free Float (%)

52- wk HI/Lo

Avg. Volume BSE (Monthly)

Face Value (Rs)

Dividend (FY 10)

Shares o/s (Crs)

532321

CADILAHC

CDH IN

12,576

25.2

681/314

33034

5.0

20%

20.5Relative Performance 1Mth 3Mth 1Yr

Cadila -1.5 -1.5 90.1

Sensex 4.0 11.1 16.2

Shareholding Pattern as of 30 June 2010

Promoters Holding 74.8%

Institutional (Incl. FII) 17.6%

Corporate Bodies 1.1%

Public & others 6.5%

Runjhun Jain Nagraj – Research Analyst(+91 22 3027-1525)[email protected]

5075

100125150175200225

9‐Sep 9‐Dec 9‐Mar 9‐Jun 9‐SeCadila Sensex

Particulars Net Sales

(Rs Cr)

Growth

(%)

EBITDA

(Rs Cr)

EBIDTA

(Margins %)

PAT

(Rs Cr)

PAT

(Margins %)

Adj EPS

(Rs)

P/E

(x)

P/

FY09 2,927 26.0 606 20.7 303 10.4 14.8 41.5 1

FY10 3,687 25.9 809 21.9 505 13.7 24.7 24.9

FY11E 4,487 21.7 996 22.2 633 14.1 30.9 19.9

FY12E 5,368 19.6 1,224 22.8 809 15.1 39.5 15.5




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Table of Contents Page NoInvestment Rationale 4-5

Robust Export Growth

4

Strong Domestic Presence 4

Targeting Niche & High Growth Segments 5

Consumer Healthcare Segment 5

Strategic Partnerships In Forms of JVs 5

Organic Growth Supplemented By Inorganic Expansion 5

Company Background 6

Business Overview 6-16

Finished Dosages 7-11

o Domestic 7o Exports 8-11

API 11

Consumer Healthcare 11-13

Animal Healthcare 13

Unique Model: JVs 13

Research and Development 14-16

Quarterly Result Analysis 16

Peer Comparison 17

Risks and Concerns 17

Valuation and Recommendation 18 PE Chart

Financials 19




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INVESTMENT RATIONALE

Robust Export growth : From US to Taiwan

Currently Cadila is getting ~40% of revenues from formulations exports. It caters both to

regulated as well as semi regulated markets. We see the next phase of growth coming fromexports markets for the company. It entered the US market 5 years ago and in the shortspan of 5 years of US operations the company has been able to grow its US sales at CAGR of91% from FY06 to FY10 and currently contributes 19% of gross revenues. We expect it tocontribute to ~24% of revenues by FY12 growing at a healthy CAGR of 35% on back of strongproduct pipeline. The company plans to launch 12-15 ANDAs annually. Cadila is also makingforay in high value generics like pulmonary, transdermal, oncology, hormones, and topicalproducts which is $180 bn plus opportunity in near to mid-term period. Given the complexnature of products entry barriers is high ensuring margin stability.

Cadila is not looking tender based markets like Germany and mainly focus on prescriptionmarkets like France and Spain in Europe. It has adopted inorganic route to enter thesemarkets by acquiring Alpharma in France and Laboratorios in Spain. We expect Franceregion sales to grow at CAGR of 22.5% for next two years. We also expect profitability to

improve in both of these markets as the company is transferring manufacturing of moreand more products to India thus reducing the cost base.

The company has also forayed into Japan markets which has been the most difficult tomarket for any company to crack. Cadila adopted the most logical way to enter Japanesemarkets i.e. by way of acquisition. Cadila has acquired a company called Nippon in FY07and although it has not yet able to garner any significant share from Japanese markets wesee huge growth potential in future. Given the increased thrust of the Japanesegovernment on generics in order to reduce the cost of healthcare and head start benefit ofCadila in the market we are confident that the company would be able to grow rapidly inthe region.

Semi regulated markets like Brazil and RoW are shaping up decently for the company.Together they contributed around 9.5% to gross revenues in FY10. Brazil markets are

branded generics market just like India providing stability to margins. We expect thesemarkets to grow @20% for next two years. The company has successfully forayed intoTaiwan last year and with that has become the first Indian company to start operation inhighly regulated but promising markets. It has plans to enter Thailand son which is lookingattractive given the branded generics characteristics and low competition of the markets.

Strong domestic presence: CASH COW

Cadila is the 5th largest player in domestic markets with 3.7% market share. It is a leader incardiovascular, gastro intestinal, women’s healthcare, and respiratory segments in thecovered market. It derives 57% of revenues from chronic therapy segments giving higherrevenue visibility to the company. Domestic formulations contributed 40% to grossrevenues in FY10 with 95% coming from branded formulations portfolio. It is one of theearliest players to target rural markets. It has an impressive field force of 4,500 people

divided among 11 divisions to target wide range of doctors and to penetrate deeper intothe country. It is having a run-rate of around 60 launches (including line extensions) in thedomestic market thus maintaining the growth momentum. The company is also targetingnew therapeutic segments to increase the scale and scope of its operations in India.Stable domestic formulations give a freedom to the company to foray new region and newavenues of growth thus acting as a “CASH COW” for the company. We believe thecompany would be able to match industry growth and expect it to report Rs 1,808 cr ofdomestic formulations revenues in FY12E, a CAGR of 11.8%.

Exports to drive

growth in future…

Domestic marketwould sponsor theexpansion program

in export regions…




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Targeting niche and high growth segmentsIndian vaccines maker is expected to be Rs 3,000 cr in size which provides huge potential

to grow for the participants. Cadila is emerging as a serious player in the segment with

rabies and H1N1 vaccines in its account. Cadila healthcare is targeting new niche segments

to grow to the next phase. Vaccine segment gets higher valuation as it is a complexproduct which posts high barrier for entry and needs specialized skills to get success. We

believe that Cadila has been able to crack the code and now poised for high growth. It is

the first Indian company to launch H1N1 vaccine which shows the strong capability of its

research and manufacturing skills.

The company is also entering other “difficult to enter” segments like Pulmonary (brand

sales of $20bn), Transdermal ($10bn), Biogenerics ($40bn), Topical ($16bn) etc. These are

near to mid term growth drivers of the company as these are high value low competition

products.

Consumer healthcare segment: Another feather in the hatConsumer healthcare and wellness business contributed 7.4% of gross revenues in FY10.

The company functions under three segments namely “Sugar substitutes,” “Skin-care,” and

“Margarine” which is listed separately under a 72% subsidiary called “Zydus Wellness.” It is

growing @ CAGR of 34% since last 4 years. It is a market leader in Peel off segment with

98% market share and in Scrubs with 75% market share under “Skin care segment.” Also

largest player in “Margarine” segment. It has recently launched “Menz” under “Skin care

segment” for men. We expect it to grow @ 25% for next two years and to contribute 8%

plus to gross revenues. The segment enjoys higher than average company margins at NPM

of 17% which has increased from last year. We believe the company still has room for

potential to increase its consumer business margins further.

Strategic Partnerships in form of JVs

Cadila healthcare has adopted a unique business model of involving customers directly in

to the business by forming JV with them. It has done it with Hospira, Nycomed and recently

with Bharat Serum and Vaccines. This provides many benefits to the company like sales

stability and visibility, technological transfer from market leaders, access to the markets

where it is not present to name a few. We are positive on the future of these JVs and

expect company to do such more deals in future.

Organic growth complemented by a string of successful acquisitions

The company has started acquiring brands, companies since last 4-5 years to fasten the

pace of its growth which has worked well also for the company. It has done strategic

acquisitions to fill the gaps in markets, business segments or product wise. This strategyhas shortened the learning curve of the company and gave it a competitive advantage in

the targeted fields. We believe the management has proved its mettle by managing well

all the acquisitions done till now and have grown them many fold. We believe that Cadila

one among few companies who has able to turn around its acquired targets and could get

the maximum benefit from them. This shows the superior leadership capabilities of the

management.

Unique Modelof partnership…Providesstability andhighervisibility to

revenues




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COMPANY BACKGROUNDZydus Cadila is a global healthcare provider and one of the top five pharma companies inIndia. The company was founded by Late Mr. Ramanbhai B. Patel in 1952 and went on to

become the second largest pharma company in the early 1990’s.

In 1995, the group restructured its operations and now it operates as Cadila HealthcareLtd., under the aegis of the Zydus group spearheaded by Mr. Pankaj R. Patel, Chairmanand Managing Director. The group has a strong presence in the cardiovascular,gastrointestinal, women’s healthcare segments, respiratory, pain management, CNS, anti-infectives, oncology, neurosciences, dermatology and nephrology segments with field forceof 4,500 reaching out to super specialists, specialists, surgeons, physicians, and the ruralmarkets. It has 11,000 dedicated work-force spread across the world.

The company has a well integrated business model having presence from API to R&D. It’sone among the very few companies to have presence in Top three markets – US, Japan andEurope. It also has presence in Emerging markets which are high growing regions. Cadila is

also a strong player in domestic markets with its strong legacy. Cadila believes in qualityand hence gives more thrust on R&D for its future expansion hence invests close to 5-6% ofrevenues annually in R&D.

Cadila caters to consumer market also via its listed subsidiary - Zydus Wellness, in which itholds 72% share. Zydus wellness is the market leader in the segments present which waspossible only due to its niche segment approach.

BUSINESS OVERVIEWCDH is a mid-sized company but with its unique model and positioning it enjoys thegoodwill similar to large caps. Cadila caters to both domestic as well as exports marketswith its wide range of products. It is a well established player in domestic region enjoying3.7% market share. It is a late entrant in regulated markets like US and Europe but with itsfocus and niche product approach has achieved an impressive growth.Cadila healthcare is a research based integrated company supplying from APIs toFormulations. It has a consumer products division under the separately listed company –Zydus Wellness. It also has a small business of animal health.

Source: Company, NB Research; Sales FY10

Cadila

Domestic

(41%)

Formulations

(40%)

API

(1%)

Exports

(44%)

Formulations

(37%)

API

(7%)

JVs

(4%)

Hospira

(2%)

Nycomed

(2%)BSV

Others

(11%)

Consumer

(8%)

AnimalHealth

(3%)




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FINISHED DOSAGESDomestic Formulations: Cadila Healthcare (CDH) operates both in branded generics aswell as generics generics segment in the domestic market although major portion ofrevenues comes from branded generics portfolio i.e. 94% of domestic formulations

revenues. The company derives 57% of its domestic revenues from chronic segment givingrevenue visiabilty and ensure margin stability.Cadila has retained its leadership position in cardiovascular, gastro intestinal, women’shealthcare and respiratory segments in the covered market. As on FY10 16 of its’s brandsfeatured in the top 300 pharmaceutical brands in India.It has a strong field force of 4,000 people spread across 11 therapeutic focused divisionsand doctor coverage of 125,000. It is expected to increase to 4,500 to cover 150,000doctors by FY11.The company has vast product portfolio based on strong R&D capabilities which allows it tolaunch around 30 products every year with similar number of line extensions which fuelsthe growth engine of the company. New product launched during FY10 contributed 2.5% tothe growth of formulations business in India.

Products Launched FY07 FY08 FY09 FY10

New Products39

35 25 30

Line Extensions 25 30 30

1st time in India 8 10 15 17Source: Company

Domestic business is kind of CASH COW for the company – Established business with steadymargins. Inflows from the domestic business are getting utilised to expand in newergeographies, launching new therapeutic segments, penetrating existing regions etc. Itprovides cushion of safety to the company.

Source: Company

PainManagement

7%

Dermatology3%

Nutraceuticals2%

Respiratory10%

Anti-Infectives11%

Biologicals 4%

Cardiovascular20%

Diagnostics 2%

FemaleHealthcare 10%

GastroIntestinals 17%

Neurologicals3%

Others 11%

Therapeutic Wise Break Up of Branded Formulations Revenues

Cardiovascular isthe largestcontributorfollowed byGastro Intestinals




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Therapies FY08 FY09 FY10

Chronics 57% 57% 57%

Acute 27% 28% 27%Biologicals 4% 3% 4%

Others 12% 12% 12%Source: Company

Exports Formulations: Curently export formulations contributes 36.5% of Cadila’s grossrevevues increased up from 20.1% in FY06. With company’s approach to target newmarkets, penetrate deeper in exisitng regions we expect contribution from exportformualtion to go higher in future.

Source: Company, NB Research

Cadila is serving the across the globe with US, Europe, Japan and Emerging markets likeBrazil, Thailand etc., thus de-risking its business model by having diversification benefits.

Source: Company, NB Research

75.5%67.7%

63.0%56.3% 51.8% 49.1% 47.5%

24.5%32.3%

37.0%

43.7% 48.2% 50.9% 52.5%

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Domestic Exports

Higher contributionfrom chronicsegment ensuresstability of margins

US 51%

Europe21%

LatAm14%

Japan 2%RoW 12%

FY10

US 56%Europe

19%

LatAm12%

Japan 3%RoW 10%

FY12E

Percentage share

of Exports wouldincrease….




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Regulated markets US: The US generics industry accounts for largest portion in the global generics space. Therecent healthcare reforms in US are expected to increase the generics contribution to the

total sales and volume. The company derives largest portion of its export formulationsrevenues from US despite being a late entrant in US markets (entered the markets inFY05). It had been possible only through the focused approach of “Customer CentricModel”; it has adopted to capture the market. The company saw its revenues [email protected]% CAGR from FY07 to FY10. During the short period of five years of operation in USthe company has managed to garner 20% market share in its 12 out of 32 productslaunched which by any means is impressive also in its five years operations in US, Cadilahas been ranked fastest growing generic company in US by IMS for three consecutiveyears.

The company targets niche, low competition, and high margins products to increase itsmarket presence in US. Currently, it is among the top 20 generic companies in the US.

It has filed 113 cumulative ANDAs till date and out of that received 56 approvals. Cadilahas a robust product pipeline enabling it to maintain filing run-rate of 12-15 every year.

To further strengthen its position in the most competitive market, Cadila has initiated theprocess of launching products in other dosage forms like pulmonary, nasal and injectibles.It has already filed 7 ANDAs for Nasal and 14 for Parenterals. These products are “difficultto make” ensuring higher growth and better margins.

Captive usage of API for half of the products takes care of quality and pricing relatedissues.

We expect that the company would outpace industry growth and would be able tocontinue its growth momentum. We expect Cadila’s sales from US to grow @35% CAGR fornext two years.

Europe: Company operates in two key markets in Europe(1) France and(2) Spain

The company has stayed away from tender based pricing model markets like Germany. Ithas adopted an inorganic route to enter these markets.

France: French generics market was Euro 2.5 bn in 2009 growing at a healthy rate of 15%and covered market size is Euro 1.6 bn which is also growing @ 15%.The company marked its first footprint in the region way back in 2003 via acquiring acompany called Alpharma SAS. It was the first international acquisition by Cadila.Alpharma had 109 product registrations and Euro 5 mn sales at the time of acquisition.Since then it has managed to grow its base in the market to now Euro ~46 mn of saleswhich is growing higher than the industry average. It has filed 60 products in France andgot approval for 42 products.With more emphasis from French government to reduce the cost of healthcare we believethat France is up for structural change in respect to usage and penetration of genericsmarket.




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Spain: Spain generics market was Euro 713 mn in 2009. It’s the fifth largest market inEurope.Cadila acquired Laboratorios Combix in FY08 to enter Spain markets. Currently it has a

healthy product portfolio of 30 products. In addition from FY10 onwards it has startedfiling for site transfers of existing products to push the margins up. We believe that thecombination of new product launches and site transfers to India would derive the growthmomentum for the company in Spain.

The contribution from Europe is expected to increase slowly and steadily from 7.2% inFY09 to 8.1% in FY12E. We expect European sales to grow @ 22.5% for next two years andto report Rs 411 cr of revenues in FY12E.

Japan: Japan is second largest market, of ~ $80 bn in size, only after US but as it is mostdifficult market to make roads in as generic penetration is still very low.Cadila adopted the acquisition route for Japan also which gives it a local face asacceptance of foreign brand and products is very low. It acquired Nippon in FY08. It has

launched 24 new in-licensed products in last two years and currently draws Rs 31.6 crrevenues from the territory. Currently the base is quite small as the market is stillopening up to generics. We believe that Japan offers huge growth potential to thecompany but it would require some more time to get noticeable share. We expect Cadilato grow at 35% CAGR in Japanese markets and to touch Rs 58 cr of revenues in FY12E.

Semi-regulated markets

Latin America: The key market in Latin America is Brazil. It is one of fastest growingmarket across globe, currently valued at $15 bn. Brazilian market is like Indian market interms of characteristics: 80-90% is branded generics ensuring higher margins.Cadila Healthcare acquired Nikkho in FY08 and caters to branded generics space via this.For addressing the needs of generics generics space it has separate subsidiary namedZydus Healthcare Brasil Ltda.

The company has filed 59 dossiers till now of which 20 have been approved and 14 havebeen launched. It is targeting 8-10 launched every year.We believe that it would grow at 20% for next two years and would report revenues ofRs 229 cr in FY12E.

Emerging Markets: Cadila is also present in 20 other high potential and high growingcountries in Asia PC, Middle East, Africa and CIS region and collectively post revenue fromthem under emerging markets.




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In FY09 Cadila had taken 70% stake in a South African company, Simayla Pharmaceuticalsto penetrate deeper in the region. South African market is the only regulated market inthe entire African region. Recently Cadila has taken the remaining 30% stake in thecompany making it a 100% subsidiary. The company has strong presence in the

cardiovascular, anti-infective, respiratory, CNS, gastrointestinal and women’s healthcaresegments thus leveraging its core strength.Recently it has ventured into Taiwan and has become the only Indian company tosuccessfully start operations in that highly regulated market.

ACTIVE PHARMACEUTICAL INGREDIENTSAPI and Intermediaries:The company gets revenues from three various sources

From India – Rs 31.8 cr in FY10 From Exports – Rs 264.2 cr From Nycomed JV (discussed later in the report under JV) – Rs 75.8 cr

Backward integration into APIs provides an edge to the company over its competitors.

Besides supporting margins and smooth functioning of integrated efforts, captive usage ofAPIs also take care of privacy issues.Cadila has strong product pipeline of APIs which can be concluded from the fact that itfiled 14 DMFs in FY10 alone taking the cumulative filings to 90.We expect Indian API business to remain flat but see a healthy growth of 17.5% in exportsover next two years.

CONSUMER HEALTHCARE – Zydus WellnessConsumer Healthcare:Cadila healthcare also has a consumer healthcare and wellness business under a separatelisted company - Zydus Wellness. It holds 72% in the company.Cadila split the two companies in FY08 to have focused approach for both businesses.Zydus wellness is market leader in most of the participated segments.

It operates under following three segments

Segments Brand

Skin Care EverYuth

Sugar Substitutes Sugar Free

Table Spread Margarine NutraliteSource: Company

EverYuthIt provides specialty range of skin care in niche segments. With its focused approach andinnovative initiatives it has achieved significant market share in the covered segments.

Sub Segment Position Volume Market Share

Scrubs Leader 69.5%Peel Offs Leader 98.6%

Face Wash 2nd Largest 13.0%Source: Company

Recently it has forayed into the emerging male grooming segment with EverYuth Menz. Itis one of the few companies present in the segment. We expect the benefit of first moveradvantage would soon be visible on top-line.




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Sugar FreeFrom being a “need to use product” for diabetic people to now a “preferred to useproduct” for health consious people, the journey of Sugar Free has been very rewarding.It is a market leader in artificial sweetners category with over 80% of market share. It isavailable in tablet as well as powerder form. In FY05, the company has launched ready todrink and powdered soft drink concentrate variant, ‘Sugar Free De’lite, which is alsogrowing at a robust growth.

NutraliteMargarine as a generic term, can indicate any of a wide range of butter substitutes.The butter substitute market is slowly gaining ground in Indian markets. India istraditionally a high butter consuming market and in the past five years, there is a shift inconsumption observed, whereby, consumer acceptance of healthier alternatives isincreasing.Cadila acquired the brand “Nutralite” four years back. Since then it has repositionedrevamed and relaunched the brand and currently it is the largest brand in the margarinecategory in India.

To cater to the growing demand of Sugar Free and EverYuth, which are outsourced atpresent, the Company is setting up a manufacturing facility in Sikkim, which is expected




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to be commissioned in 2010-11. This state-ofthe- art facility will be sufficient to meet thesupply requirements for the next five to seven years.

From FY06 to FY10, the consumer business has shown a strong growth of 33.6% CAGR. In

future we expect the business to post robust growth of 25% CAGR over FY10-FY12E.

ANIMAL HEALTHCARECadil supplies products in livestock and poultry segments through its 100% subsidiary ZydusAnimal Health Ltd. In FY10 it has started catering to canine segment also with launch ofeight products which has helped the company to grow the business by 8.5% in FY10despite several unfavorable events like poor monsoon, bird flu outbreak etc. We expectthe segment to post 6% CAGR over next two years and to report Rs 143 cr revenues inFY12E.

UNIQUE MODEL: JVsCadila has adopted a unique model to grow its business. It has formed JVs with strategicpartners to have long term relationship which helped the company in having higher

revenue visibility and to gain from the experience of its partners. Till now it has formedthree such JVs.

Zydus Nycomed Healthcare Pvt LtdInitially started to manufacture Key Starting Materials (KSM) for Pantaprazole the scope ofthis JV has been increased now and 14 new products have been added. It’s a 50:50 JVbetween Nycomed and Zydus Cadila to manufacture APIs. To cater to the expansion theJV is setting up additional facilities which is expected to be operational soon.

Zydus Hospira Oncology Pvt LtdThis is 50:50 JV between Zydus and Hospira to manufacture and market oncologyproducts. The JV mainly focuses on injectibles and for that it has set up a manufacturingfacility in SEZ Ahmedabad. Injectibles are “difficult to manufacture” products henceensures profitability. FY10 was the first year of commercial operations for the JV withthree products for European region. It has also started supplying to India. Company is alsoeyeing US region. We believe soon the company would start supplying to US also andexpect it to launch 1-2 more products in Europe in FY11.

Zydus BSV Pharma Pvt LtdZydus Bharat Serum and Vaccines Pharma Pvt Ltd (ZBSV) is again a 50:50 JV between twocompanies. It operates in novel patented as well as generic oncology contract segment. InIndian region, a patented drug “NUDOXA” has been launched which continues to grow atencouraging rate. The JV has completed Phase I clinical trials of a novel patented productand approval for the same have been filed in the US and Europe. Also Phase II/III has beenstarted on the product for semi-regulated markets including India. We expect meaningfulcontribution of revenues to start from FY12E although we have not included any numbersfrom the JV in our projections.

Abbott Deal:Zydus Cadila and Abbott have signed a pact for 24 products to be marketed in 40emerging markets. The deal holds option to increase the scope of products by 40additional products also.As per the agreement, Abbott would license 24 branded generics products of Zydus inpain, cancer, cardiovascular, neurological, and respiratory therapeutic segments. It’s awin-win situation for the parties as it gives an opportunity to Zydus to leverage its




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product portfolio and manufacturing facilities and provides a window to Abbott toincrease its penetration and fuel its growth in the targeted markets.In May 2010, Cadila has received Rs 47.36 cr ($10 mn) as milestone payment. Meaningfulrevenues from product launched would start kicking in from FY12. We are positive on the

future prospects of this deal.

RESEARCH AND DEVELOPMENTCadila aims to be innovation driven research based company by 2020. It has a strong teamof total 900 scientists involved in NME, NDDS, Biologics and API research. It is one of fewcompanies in India which gives thrust on R&D and consider it an area of future growth.

Source: Company

Source: Company

R&D activity can be further be classified as: New Molecule Entity (NME): 12 different projects are undergoing out of which 10

are being handled by company alone and two are in collaboration. Main focusareas of NME research are: cardiometabolic, inflammation, pain, and oncology.The company has strategic R&D collaboration with Karo Bio and with Eli Lillygiving it an opportunity to gain from market leader’s experience.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

50

100

150

200

250

FY06 FY07 FY08 FY09 FY10

Revenue Expenditure Capital Expenditure % to Sales

With R&D facilitiesin place, thecompany hasreduced its capitalR&D expenditure.But to support itsfuture growth Cadila

is committed tospend more onRevenues R&D.

NME 350

Biologics 120

Generics 280

API 150

Division Of Talent Pool




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mainly caters to the needs of generic industry. Other field of research is APIChemical Process Research which fulfills the requirement of API business forboth domestic and foreign markets.

RECENT UPDATEDuring the Q1FY11, the company rewarded its shareholders with bonus shares of1:2, which has increased the number of equity shares from 13.6 cr to 20.5 cr.

QUARTERLY RESULT ANALYSIS – Q1FY11

Cadila reported robust sales growth of 20.1% yoy on back of strong support fromdomestic formulations (17.3% yoy), consumer (36.2% yoy) business and from USSales (50.8% yoy).

Margins enhanced on improved product mix, lower manufacturing cost, and higherAPI sales. Milestone payment of Rs 47.36 cr from Abbott also gave a push to

margins in this particular quarter.

Particulars (Rs in Cr) Q1FY11 Q1FY10 yoy Q4FY10 qoq

Net Sales 1,055 880 20% 816 29%

Other Op. income 79 23 239% 31 156%

Total Income 1,134 904 25% 847 34%

Cost of materials 326 283 15% 291 12%

Personnel Exps 128 102 25% 108 18%

Other exps 383 315 22% 258 48%

EBITDA 297 204 46% 189 57%

margins (%) 26% 23% 22%

Depreciation 31 30 6% 40 -21%

PBIT 266 174 53% 149 78%

Interest 32 24 30% 17 87%

Other Income 3 4 -32% 5 -44%

PBT 237 154 54% 138 72%

Tax 34 24 39% 7 399%

Tax rate (%) 14% 16% 5%

PAT 204 130 57% 131 55%

Minority Interest 4 4 12

EO items 0 1 0

PAT reported 199 125 60% 119 68%

margins (%) 18% 14% 14%

Equity Capital (FV Rs 5) 102 102 102

EPS 9.7 6.1 60% 5.8 68%




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PEER COMPARISONWe are comparing Cadila Healthcare with Lupin, Sun Pharma, Cipla, Dr Reddy and Bioconas all these companies caters to domestic as well as export markets. Cadila Healthcare is amid size player compared to its peers but has better growth prospects in future. It has best

return ratios among the compares players with lowest EV/Sales and EV/EBITDA only afterBiocon. This provides further scope for the stock price to increase.

We expect total revenues of Cadila to grow at a CAGR of 19.3% over the next 2 years buthigher growth in bottom-line which is expected to report CAGR of 28.1% for the sameperiod. On the valuation front, the company is currently trading at 3.5x EV/Sales which issignificantly below the peer group average of 5.0x giving an opportunity for investment inthe stock. Based on these multiples Cadila looks fairly attractive as compared to its peers.

RISKS & CONCERNS

Currency FluctuationsCurrently the company derives around 50% of its revenues from exports marketswhich is expected to increase in future. Any adverse currency movement (like theindustry witnessed in FY09) will impact the realizations of the company andeventually impact the margins of the company which would lead to a deviation fromour estimates.

Delay in ANDA approvals from USFDAFDA has become stringent in providing approvals for ANDAs as well as for plantapprovals. Due to this and increased filings from players the average approval timehas been increased to 24 months which has impacted the industry in general. Anyfurther increase in approval run-rate would delay the projections and would impactthe bottom-line of the company.

Change in regulatory guidelines in emerging markets

Any changes by the regulatory body of respective countries (like Germany marketmoved to tender based pricing from OTC and prescription markets initially) wouldimpact the business prospects of the company and cast a doubt on our projectednumbers.

FY10 Sales EPS Price Mcap EV PE RONW EV/S EV/EBITDA P/

Consolidated (Rs in Cr) (Rs) (Rs) (Rs in Cr) (Rs in Cr) (x) (%) (x) (x) (x

Lupin 4,871 15.3 376 16,723 17,661 24.5 26.5 3.6 18.0 6.

Sun Pharma 4,103 65.2 1,746 36,154 35,718 26.8 17.3 8.7 26.2 4.Cipla 5,360 13.5 307 24,609 24,552 22.7 18.3 4.6 23.0 4.

Dr Reddy 4,553 50.1 1,404 23,697 23,892 28.0 14.3 5.2 20.3 4.

Biocon 2,368 14.7 346 6,917 7,291 23.6 16.7 3.1 15.5 3.

Average 4,251 31.8 21,620 21,823 25.1 18.6 5.0 20.6 4.

Cadila 3,687 24.7 614 12,576 12,792 24.9 31.0 3.5 15.8 7.




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VALUATION AND RECOMMENDATION

We believe that Cadila net sales will grow at a CAGR of 19.3% over a next two years

whereas net profit is expected to grow at a higher CAGR of 28.1% during the sameperiod, on account of sales from newer territories, new product launches, anddeeper penetration in existing regions. Also strong growth in domestic markets willsupport the expansion plans of the company, domestic business also acts as cushionto the company incase anything undesirable happens in newer areas. Managementhas guided of $1bn (~ Rs 4,600 cr) sales in FY11 which translates into 24.8% growthover FY10 sales and $3 bn by 2015, growth of 30% CAGR. Being on conservative basiswe are projecting Rs 4,446 cr sales in FY11E, a growth of 20.6%.

We expect the company to earn an EPS of Rs. 32.0 in FY11E and Rs. 39.5 in FY12E. Atthe CMP of Rs. 625 per share, Cadila is currently trading at a PE of 19.9x FY11E and15.5x FY12E EPS which looks attractive given the revenue visibility of the company.We believe that the company has done the groundwork and has made investments in

right direction like acquisitions done to enter new regions and business segments andnow it is the right time to enjoy the fruits of all those efforts.

The company has historically traded at a PE multiple in the range of 19-21x (as shownin the PE Band below). We believe that Cadila should be valued on a PE multiple of20x. Based on our EPS of Rs. 39.5 for FY12E and a target multiple of 20x we arrive attarget of Rs. 790. Consequently, we initiate with a BUY rating on the stock with atarget price of Rs. 790, indicating a potential upside of 28.7%.

1 yr Forward PE Band

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

Price 5 10 15 20 25




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P&L (Rs. Cr) FY09A FY10A FY11E FY12E Balance Sheet (Rs Cr) FY09A FY10A FY11E FY12E

Revenues 2927.5 3686.8 4487.1 5367.8 Share Capital 68.2 68.2 102.4 102.4

% change 26.0% 25.9% 21.7% 19.6% Reserves & Surplus 1167.0 1560.3 2007.0 2622.0

EBITDA 605.8 808.6 996.1 1223.9 Minority 22.8 39.2 72.5 115.1

EBITDA margin 20.7% 21.9% 22.2% 22.8% Net Worth 1258.0 1667.7 2181.8 2839.4

Depn & Amort 111.8 133.9 146.6 159.9 Deferred Tax Liab 131.6 114.1 114.1 114.1

Operating income 494.0 674.8 849.5 1063.9 Total Loans 1267.4 1090.5 1028.5 978.5

Interest 120.4 82.1 79.5 75.3 Total Liabilities 2657.0 2872.3 3324.4 3932.0

Other Income 20.3 15.9 13.5 13.5 Net Fixed Assets 1529.8 1684.4 1754.4 1861.2

PBT 393.9 608.5 783.5 1002.1 Capital WIP 155.5 211.1 144.4 177.8

Tax 66.6 74.1 117.5 150.3 Pre operative Exps 33.4 37.1 37.1 37.1

MI and EO 24.2 29.3 33.3 42.6 Investments 24.9 20.7 20.7 20.7

PAT 303.1 505.1 632.7 809.2 Cash & Bank 251.7 250.7 649.0 1177.3

Sh o/s - Diluted 20.5 20.5 20.5 20.5 Debtors & Other CA 1353.2 1534.4 1875.5 2178.6Adj EPS 14.8 24.7 30.9 39.5 CL & P 691.5 866.1 1156.7 1520.7

Cash EPS 20.3 31.2 38.1 47.3 Net CA 913.4 919.0 1367.8 1835.3

Quarterly (Rs. Cr) Sep.09 Dec.09 Mar.10 Jun.10 Total Assets 2657.0 2872.3 3324.4 3932.0

Revenue 945.8 991.0 846.5 1133.8 Cash Flow (Rs. Cr) FY09A FY10A FY11E FY12E

EBITDA 205.7 210.0 189.3 297.4 Operating Cash Flow

Dep & Amorz 31.1 33.4 39.8 31.4 Net Profit before tax 581.7 804.0 996.1 1223.9

Op Income 174.5 176.6 149.5 266.0 Change in WC -93.3 -40.2 -50.5 60.8

Interest 20.6 21.7 15.8 22.4 Tax -66.6 -74.1 -117.5 -150.3

Other Inc. 4.1 2.5 5.1 2.9 CF from Operation 421.8 689.7 828.1 1134.4

Forex Loss (Gain) 2.5 -3.8 1.1 9.2 Investing ActivitiesPBT 155.6 161.2 137.8 237.3 Capex -424.0 -330.1 -150.0 -300.0

Tax 17.6 25.5 6.8 33.8 Oth Inc & Investments 20.8 20.1 13.5 13.5

MI & EO 6.1 6.0 12.3 4.3 CF from Investing -403.2 -310.0 -136.5 -286.5

PAT 138.0 135.7 131.0 203.5 Financing

EPS (Rs.) 6.4 6.3 5.8 9.7 Diviend Paid -79.6 -123.7 -151.8 -194.2

Performance Ratio FY09A FY10A FY11E FY12E Share Capital 5.4 0.0 0.0 0.0

EBITDA margin (%) 20.7% 21.9% 22.2% 22.8% Loans & Others 214.7 -257.0 -141.5 -125.3

EBIT margin (%) 16.9% 18.3% 18.9% 19.8% CF from Financing 140.5 -380.7 -293.3 -319.5

PAT margin (%) 10.4% 13.7% 14.1% 15.1% Net Chg. in Cash 159.1 -1.0 398.3 528.4

ROE (%) 24.5% 31.0% 30.0% 29.7% Cash at beginning 92.6 251.7 250.7 649.0

ROCE (%) 15.1% 20.4% 21.4% 22.5% Cash at end 251.7 250.7 649.0 1177.3

Valuation Ratio FY09A FY10A FY11E FY12E Per Share Data FY09A FY10A FY11E FY12E

Price Earnings (x) 41.5 24.9 19.9 15.5 Adj EPS 14.8 24.7 30.9 39.5

Price/BV (x) 10.2 7.7 6.0 4.6 BV per share 60.3 79.5 103.0 133.1

EV / Sales 4.6 3.6 2.9 2.3 Cash per share 12.3 12.2 31.7 57.5

EV / EBITDA 22.4 16.6 13.0 10.1 Dividend per share 3.0 5.0 6.2 7.9




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Note

Disclaimer

This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The

information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have

been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient

only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only.

Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents

stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information,

errors, or omissions in this connection. This document is not to be considered as an offer to sell or a solicitationto buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold

positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from

or perform investment banking or other services for any company mentioned in this document.

Cadila Healthcare Ltd IC 130910

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