EBITDA stood at Rs6,320mn, which is 19.1%/18.9% below our/consensus estimates and adjusted for one – off it is lower than estimates by 10%. We have retained Buy rating on Cadila with a target price (TP) of Rs315, valued at PE multiple of 20x.
We downgrade our Revenues by 0.7%/0.5% in FY20E/FY21E due to downgrade in US and EU business. We broadly maintain our EBDITAM at 20.7% for FY20E while we downgrade by 50 bps to 20.5 % for FY21E. We downgrade our EPS for FY20E/ FY21E by 1%/8.5 % to Rs 14.6/ Rs 16.3 for FY20E/FY21E. We downgrade our rating to HOLD with a revised price target of Rs 261 based on 16x FY21E.
We maintain BUY on CDH despite a miss on our estimates due to certain one-time costs. We have cut our FY21 EPS by 6% to accommodate higher interest cost. Our TP is revised to Rs 265 (18x FY21E EPS).We upgraded CDH recently as we believe that the impact of OAI on its key formulations facility at Moraiya, Gujrat is already priced-in. The sharp ~30% FYTD fall in the price makes it one of the cheapest among the large-cap pharma stocks at 15.7x onFY21E EPS. With ~100 pending approvals and 2/3rd of them being filed from Ex-Moraiya units, we believe US$ 800mn US revenues and Rs 14.6 EPS (ex-Asacol HD) are achievable. With the ability to generate Rs 8-10bn FCFs annually, net debt position remains comfortable at ~Rs 70bn (0.7x FY19).
Valuation - Maintain Hold with marginally downward revised PT of Rs.275: The stock has corrected by ~45% from its high and is currently trading at 11.4x its FY2021E earnings. We expect the company to report salesand profit CAGR of 11% and 8%, respectively, over the next two years.Although the quarter’s performance was better than expectation, recent classification of Moraiya facility to OAI by the USFDA has dampened sentiments. This development does not impact ongoing operations but could delay new product approvals and remediation and re-inspection of the facility could take 6-9 months. Thus, we feel although the valuation is reasonable, if Moraiya issues get escalated to an import alert, earnings can be downgraded. We would like to wait until further clarity emerges. Hence, we maintain our Hold rating on the stock with marginally downward revised PT of Rs. 275.
Q1 in line: US, India to continue steady growth There could be possibility of higher charge backs that could lead to reduce net realisation of core US sales in Q2FY19E mainly from competitive products such as Levorphanol and gLialda. There are however a potent pipeline of generics in FY20E and FY21E such as gExelon transdermal patch and guidance of 25 ANDA launches in nine months. CDH trades at PER of 12x (FY20E) and 11.2x (FY21E). While there remain to have hangover in valuation due to large debt obligations (net debt Rs63bn) post Heinz acquisition, we maintain ‘Accumulate’ due to valuable product pipeline in US and lower base benefits in India formulations. We decrease our valuation multiples to PE 13x of FY21E earnigns due to higher contribution from US generics to continue in FY20E-21E and decreased TP to Rs266 from Rs371.
Based on three possible regulatory outcomes of the compliance observations given by the USFDA at Moraiya manufacturing unit, we see the stock price discounting the worst case. In the best case, if Moraiya gets a voluntary action indicated (VAI) status (new approvals keep coming in), we expect FY21E EPS to be Rs18 per share, while in the base case we assume an official action indicated (OAI) status (new approvals halted) and our EPS expectation is Rs16 per share. In the worst case, if Moraiya issues get escalated to an import alert, the earnings can correct about 40% to Rs11 per share. At CMP stock trades at 22x FY21E worst case EPS, while at 13.2x best case scenario.
Maintain Hold with a downward revised PT of Rs. 290: We feel that although Cadila has a big ANDA pipeline and strong control on expenses, its domestic business lacks its peers in terms of growth. Further, concentration on key markets such as U.S. and India is a risk. In addition, regulatory hurdles at Moraiya facility continue to remain an overhang for the near term. We have revised downwards our earnings estimates by 15% each for FY2020E and FY2021E on account of lowered margin guidance and increased interest cost. We maintain our Hold recommendation on the stock with lowered price target (PT) of Rs. 290.
CDH has rich ANDA pipeline for the US market. We expect strong improvement in domestic business going ahead. Form 483 (14 observations, out of which few are of serious nature, which may lead to issue of WL) on Moraiya plant is a key near-term overhang for the stock. We reduced our target multiple to 16x (from 20x earlier) owing to pending US FDA issue and rolling over our earnings estimate to FY21E. We believe risk-reward is attractive at 14.4x/12.0x FY20E/FY21E earnings, despite the near-term earnings pressures. Hence, we maintain our BUY recommendation on the stock with a revised Target Price of Rs350 (from Rs400 earlier).
Although it is early days to gauge the success, prima facie it looks beneficial from an overall revenue point of view with an India focused FMCG addition in the overall portfolio mix. Overall, the balance sheet expansion and muted growth guidance for the US may weigh on sentiments in the near term. Our new target price is Rs 280 based on 15x FY21E EPS of Rs 18.7.