4QFY2013 Result Update | Pharmaceutical

May 31, 2013

Cadila Healthcare
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Net profit 4QFY2013 3QFY2013 % chg (qoq) 4QFY2012 % chg (yoy)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 15,844 2,211 0.1 964 / 705 14,349 5 19,760 5,986 CADI.BO CDH@IN

774 909
12 months

1,566 55 947 240 262

1561 60 1023 212 103

0.3 (8.7) (7.4) 13.4 155.2

1344 69 849 229 171

16.5 (20.5) 11.6 4.8 53.6

Source: Company, Angel Research

For 4QFY2013, Cadila Healthcare (Cadila) reported numbers just in line of expectations, except on the net profit front. The companys sales for the quarter, at `1,566cr, were just-in-line with estimates. On the operating front, the gross and net operating margins came below expectations. This, along with a tax writeback during the quarter, resulted in the net profit coming in higher than expectations. Overall, the net profit came in at `262cr, a yoy growth of 53.6%. The Management expects the company to be a US$3bn one by FY2016. We recommend a Buy with a revised target price of `909. Above-expectation results: For 4QFY2013, Cadila reported net sales of `1,566cr, up 16.5% yoy, just-in-line with our estimate of `1,558cr. The performance was driven by a 14.4% yoy growth in the domestic markets, while exports on the other hand grew only by 19.7% yoy during the period. During the quarter, the companys gross margin dipped to 60.5%, a contraction of 262bps. This led the OPM to contract to 15.3%, from 17.0% in the corresponding quarter of the previous year, which is a contraction of 170bps. This along with the tax write back during the quarter, led the net profit to rise by 53.6% yoy to `262cr (vs `171cr in 4QFY2012), below our estimate of `146cr. Outlook and valuation: We expect Cadila to post an 18.1% CAGR in net sales to `8,590cr and its EPS to report a 19.1% CAGR to `45.4 over FY201315E. While we have revised the OPMs downwards from 18.0% to 15.5% for the next two years, given the revision in the tax guidance, the earning momentum is likely to sustain. We recommend a Buy with a revised target price of `909. Key financials (Consolidated)
Y E March (` cr) Net sales % chg Net profit % chg EPS EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 74.8 14.4 5.6 5.2

Abs.(%) Sensex Cadila

3m 4.8 1.9

1yr 21.8 5.9

3yr 16.6 26.9

FY2012 5,090 14.0 650 (8.6) 31.7 17.9 24.4 27.4 17.3 6.2 3.4 19.2

FY2013 6,155 20.9 655 0.8 32.0 15.0 24.2 23.3 13.2 5.2 2.9 19.1

FY2014E 7,280 18.3 785 19.8 38.3 15.5 20.2 23.5 14.3 4.3 2.4 15.8

FY2015E 8,590 18.0 930 18.5 45.4 15.5 17.0 23.1 15.4 3.6 2.1 13.3

Sarabjit Kour Nangra

+91 22 39357600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Cadila Healthcare |4QFY2013 Result Update

Exhibit 1: 4QFY2013 performance (Consolidated)

Y/E March (` cr) Net Sales Other Income Total Income Gross profit Gross margin (%) Operating profit Operating Margin (%) Financial Cost Depreciation PBT Tax Adj. PAT before Extra-ordinary item Exceptional loss/(gain) Minority PAT before Extra-ordinary item & MI EPS (`)
Source: Company, Angel Research

4QFY2013 1,566 55 1,621 947 60.5 240 15.3 32 47 217 (58) 275 0 13 262 12.8

3QFY2013 1,561 60 1,621 1023 65.5 212 13.6 48 50 175 63 111 0 9 103 5.0

% chg (qoq) 0.3 (8.7) (0.0) (7.4) 13.4 (34.1) (6.1) 24.3 (192.5) 147.0 49.0 155.2

4QFY2012 1,344 69 1,413 849 63.1 229 17.0 35 39 224 44 180 0 9 171 8.3

% chg (yoy) 16.5 (20.5) 14.7 11.6 4.8 (10.7) 19.1 (3.0) (233.6) 52.8

FY2013 6,155 240 6,395 3835 62.3 923 15.0 169 183 811 119 692 0 36

FY2012 5,090 224 5,314 3390 66.6 911 17.9 183 158 794 113 681 0 29 653 31.8

% chg 20.9 6.9 20.3 13.1 1.4 (7.7) 15.8 2.1 5.7 1.5

53.6

655 32.0

0.4

Exhibit 2: 4QFY2013 Actual vs. Angel estimates

` cr Net Sales Operating profit Tax Net profit
Source: Company, Angel Research

Actual 1,566 240 (58) 262

Estimates 1,558 299 46 146

Variance 0.5 (19.6) 79.3

Revenue up 16.5% yoy, just-in-line with estimates

For 4QFY2013, Cadila reported net sales of `1,566cr, up 16.5% yoy, and higher than our estimate of `1,558cr; driven by both domestic and export markets, which grew by 15.0% yoy and 19.7% yoy respectively. Domestic sales were led by the formulation segment which grew by 14.4% yoy, and the wellness segment, which grew by 26.4% yoy during the quarter. Exports growth on the other hand was driven by Europe, which grew by 36.0% yoy. The US on the other hand grew by 9.9% yoy. Emerging markets grew by 85.6% yoy during the period. The growth in the US exports was subdued due to lack of new products along with price erosion among its key products; the company has guided for 22 approvals in the US in FY2014. In the domestic markets, the Management indicated that the new pricing policy could lead to some near-term disruptions, tentatively pushing turnover down by ~2.5%.

May 31, 2013

Cadila Healthcare |4QFY2013 Result Update

Strengthening its regulatory pipeline, the company filed 33 ANDAs during the year, taking the cumulative filings to 173. The group received 15 ANDA approvals during the year, taking the total to 76 product approvals. The company filed 25 additional dossiers for new products in the European markets, taking the cumulative number of new product dossier filings to 161. The company filed 18 dossiers in Brazil taking the cumulative filings to 100. In Mexico, it filed 6 new product dossiers, taking the cumulative filings to 20.

Exhibit 3: Sales trend in the US and Europe

480
400

353

359

367

392

388

320
(` cr)
240 160

80
0

71

85

112
76

96

4QFY2012

1QFY2013

2QFY2013

3QFY2013

4QFY2013

US
Source: Company, Angel Research

Europe

For 4QFY2013, the domestic segment reported a 15.0% yoy growth, with the formulations segment registering a 14.4% yoy growth. In the consumer healthcare division, Cadila grew 26.4% during the period. Animal healthcare, on the other hand, grew by 6.8% yoy.

Exhibit 4: Sales trend in domestic formulation and consumer divisions

700

600
500 499

582

602

570

571

(` cr)

400
300 200 103 102 108

100
0

86

97

4QFY2012

1QFY2013

2QFY2013

3QFY2013

4QFY2013

Domestic Formulation
Source: Company, Angel Research

Consumer division

On the CRAMS front, the company generated sales of `115cr (`114cr), reporting a growth of 1.1% yoy.

May 31, 2013

Cadila Healthcare |4QFY2013 Result Update

OPM dips by 170bps yoy

During the quarter, the companys gross margin dipped to 60.5%, a contraction of 262bps. This led the OPM to contract to 15.3% (17.0%), a contraction of 170bps yoy. During the quarter, the R&D expenditure was ~8.1% of net sales vs 6.6% of net sales during 4QFY2012.

Exhibit 5: OPM trend

18.0 17.0 16.0 17.9

17.0

16.9

(%)

15.0 14.0
13.0 12.0 4QFY2012 1QFY2013 2QFY2013 3QFY2013

15.3

13.6

4QFY2013

Source: Company, Angel Research

Net profit grew by 53.6% yoy: Cadilas net profit grew by 53.6% yoy to `262cr (`171cr), higher than our estimate of `146cr. This was on account of a tax write back during the quarter. The tax write back expenses were recorded at `58cr for the quarter.

Exhibit 6: Adjusted Net profit trend

300 250 200 195 171 262

(` cr)

150

149 103

100
50

0 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

Source: Company, Angel Research

May 31, 2013

Cadila Healthcare |4QFY2013 Result Update

Concall takeaways

The company maintained its vision of being a US$3bn company by 2015 (ie FY2016). The key growth drivers for the same would be the US and Indian markets. The supply of injectible products to the US has resumed from the Moraiya facility. The transdermal facility is expected to undergo a USFDA audit in 2QFY2014. The growth in US exports was subdued due to lack of new products along with price erosion among its key products. The Management guided for 22 approvals in FY2014 and 20% growth in the region. In domestic markets, the Management indicated that the new pricing policy could lead to some near-term disruptions, pushing turnover down by ~2.5%. Tax rate guidance reduced from 25-27% of PBT to 15% of PBT in FY2014. The Management has guided for a capex of `600cr for FY2014.

Recommendation rationale
Strong domestic portfolio: Cadila is the fifth largest player in the domestic market, with sales of about `2,987cr in FY2013, contributing 47% to its top-line. The company enjoys leadership position in the CVS, GI, women healthcare and respiratory segments, with a sales force of 4,500 headcounts. The company, on an aggressive front, launched more than 90 new products in FY2013, including line extensions, of which 10 were for the first time. During FY2008-13, the company reported an ~15% CAGR in its top-line in the domestic formulation business. Further, the company has a strong consumer division through its stake in Zydus Wellness, which has premium brands, such as Sugarfree, Everyuth and Nutralite, under its umbrella. This segment, which contributes ~6.5% to sales, posted a strong growth in FY2013, registering a growth of 19.0% yoy during the year. Going forward, the company expects the segment to grow at an above-industry average growth rate of 1518% on the back of new product launches and field force expansion. During FY2013-15E, we expect the domestic segment to grow at a CAGR of 15.4%. Exports on a strong footing: Cadila has a two-fold focus on exports, wherein it is targeting developed as well as emerging markets, which contributed around 53% to its FY2013 top line. The company has developed a formidable presence in the developed markets of US, Europe (France and Spain) and Japan. In the US, the company achieved critical scale of `1,500cr on the sales front in FY2013. The growth in the US exports was subdued, on back of lack of new products along with price erosion among its key products; the company guided for 22 approvals in FY2014 and 20% growth in the region. In Europe, the companys growth going forward would be driven by new product launches and improvement in margin by product transfer to Indian facilities. In emerging markets, Cadila is aggressively
May 31, 2013

Cadila Healthcare |4QFY2013 Result Update

targeting Brazil and the CIS region. Overall, we expect exports to grow at a CAGR of 20% during the period.

Outlook and valuation

We expect Cadilas net sales to post an 18.1% CAGR to `8,590cr and EPS to report a 19.1% CAGR to `45.4 over FY201315E. While we have revised the OPM downwards from 18.0% to 15.5% during the next two years, given the revision in the tax guidance, the earning momentum is expected to be maintained. We recommend a Buy with a revised target price of `909.

Exhibit 7: Key Assumptions

Key assumptions Domestic growth (%) Exports growth (%) Growth in employee expenses (%) Operating margins (excl tech. know-how fees) (%) Capex (` cr)
Source: Company, Angel Research

FY2014E 13.0 20.0 18.3 15.5 650

FY2015E 16.0 20.0 18.0 15.5 650

Exhibit 8: One-year forward PE band

1,400 1,200

1,000
800 600

400 200
-

Source: Company, Angel Research

Company background: Cadila Healthcares operations range from API to formulations, animal health products and cosmeceuticals. The group has operations across USA, Europe, Japan, Brazil, South Africa and 25 other emerging markets. Having already achieved the US$1bn mark in 2011, it shall achieve sales of over US$3bn by 2015 and be a research-driven pharmaceutical company by 2020.

May 31, 2013

Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Price 7x 14x 21x 28x

Cadila Healthcare |4QFY2013 Result Update

Exhibit 9: Recommendation Summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Reco Neutral Buy Buy CMP (`) 136 171 774 Tgt. price (`) 264 909 Upside % PE (x) 54.4 17.4 9.8 8.9 17.0 FY2015E EV/Sales (x) 1.3 1.1 2.1 EV/EBITDA (x) 6.9 6.9 13.3 FY123-15E CAGR in EPS (%) 26.1 58.2 12.7 FY2015E RoCE (%) 34.0 12.0 15.4 RoE (%) 34.7 18.0 23.1

Cipla
Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma

Buy
Buy Buy Neutral Buy Accumulate Accumulate Neutral Neutral Neutral

370
2,093 71 2,507 63 594 740 375 2,518 1046

444
2,535 206 78 676 877 -

20.0
21.1 190.6 23.8 13.8 18.5 -

16.7
16.5 3.4 30.1 8.1 13.2 17.7 16.7 26.3 25.4

2.5
2.4 0.8 5.9 0.8 1.9 2.3 1.2 2.5 6.1

11.4
11.7 3.9 20.6 5.3 9.1 11.0 9.7 15.1 15.0

15.9
12.8 38.8 6.1 15.8 27.3 29.1 (6.8) 13.4 18.8

15.7
18.3 12.0 36.1 15.3 26.0 28.5 13.1 15.9 29.4

15.9
21.8 13.7 31.0 14.7 25.3 24.8 19.1 16.7 22.0

Source: Company, Angel Research; Note: *December year ending

May 31, 2013

Cadila Healthcare |4QFY2013 Result Update

Profit & Loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& amortisation EBIT % chg (% of Net Sales) Interest & other charges Other income (% of PBT) Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Adj.Basic EPS (`) Adj. Fully Diluted EPS (`) % chg FY2010 3,614 40 3,574 113 3,687 25.9 2,881 1,178 150 393 1,159 694 28.3 19.4 134 560 30.5 15.7 82 16 3 606 53.9 5 602 74.1 12.3 527 22.9 505 509 55.5 14.1 24.9 24.9 3.6 FY2011 4,521 56 4,465 166 4,630 25.6 3,604 1,475 162 549 1,417 861 24.1 19.3 127 734 31.1 16.4 70 13 2 842 39.0 842 106.4 12.6 736 25.1 711 711 39.6 15.9 34.7 34.7 39.6 FY2012 5,181 91 5,090 173 5,263 13.7 4,179 1,679 320 751 1,429 911 5.8 17.9 158 753 2.6 14.8 185 53 7 794 (5.7) 3 794 113.0 14.2 681 28.6 653 650 (8.6) 12.8 31.7 31.7 (8.6) FY2013 FY2014E FY2015E 6,285 129 6,155 203 6,358 20.8 5,232 2,320 387 903 1,622 923 1.4 15.0 183 740 (1.7) 12.0 169 37 5 811 2.1 811 119.5 14.7 692 36.4 655 655 0.8 10.6 32.0 32.0 0.8 7,353 74 7,280 203 7,482 17.7 6,152 2,744 457 1,068 1,882 1,128 22.2 15.5 221 907 22.5 12.5 180 37 4 967 19.1 967 145.0 15.0 822 36.4 785 785 19.8 10.8 38.3 38.3 19.8 8,677 87 8,590 203 8,793 17.5 7,259 3,238 540 1,260 2,221 1,331 18.0 15.5 254 1,077 18.8 12.5 180 37 3 1,137 17.6 1,137 170.6 15.0 967 36.4 930 930 18.5 10.8 45.4 45.4 18.5

May 31, 2013

Cadila Healthcare |4QFY2013 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & Surplus Shareholders funds Minority interest Total loans Other Long Term Liabilities Long Term Provisions Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital Work-in-Progress Goodwill Investments Long Term Loans and Adv. Current assets Cash Loans & advances Other Current liabilities Net Current assets Mis. Exp. not written off Total assets 1,775 251 307 1,217 866 909 10 2,872 2,074 873 1,201 248 484 21 2,317 969 1,348 431 484 21 201 2,125 295 411 1,420 1,087 1,038 3,523 3,008 1,175 1,833 484 1,015 24 263 2,760 467 275 2,019 1,186 1,574 5,193 4,105 1,358 2,747 248 862 21 411 3,191 582 279 2,330 1,426 1,765 6,054 4,755 1,579 3,176 248 862 21 314 3,730 506 337 2,887 1,744 1,987 6,608 5,405 1,833 3,572 248 862 21 371 4,327 583 337 3,407 2,002 2,326 7,399 114 2,872 68 1,560 1,629 39 1,091 102 2,069 2,171 67 1,092 19 62 113 3,523 102 2,471 2,574 90 2,289 43 79 119 5,193 102 2,938 3,041 119 2,681 47 64 100 6,054 102 3,548 3,652 156 2,681 43 76 119 6,608 102 4,303 4,407 192 2,681 43 76 119 7,399 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

May 31, 2013

Cadila Healthcare |4QFY2013 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in WC Less: Other income Direct taxes paid Cash Flow from Opr n. (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2010 602 134 3 16 77 646 (299) (84) 16 (368) (177) 75 (177) (279) (1) 252 251 FY2011 842 127 (286) 13 106 564 (291) (0) 13 (278) 7 (176) (72) (242) 45 251 295 FY2012 794 158 (427) 53 113 359 (743) (4) 53 (694) 1,238 (175) (557) 506 171 295 467 FY2013 811 183 (223) 37 119 614 (861) 3 37 (821) 382 (175) 115 322 115 467 582 FY2014E 967 221 (201) 37 145 805 (650) 37 (613) 7 (175) (100) (268) (76) 582 506 FY2015E 1,137 254 (319) 37 171 865 (650) 37 (613) (175) 1 (175) 77 506 583

May 31, 2013

10

Cadila Healthcare |4QFY2013 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.5 1.2 6.8 0.4 0.9 10.5 0.7 2.0 4.1 0.7 2.3 4.4 0.6 1.9 5.0 0.5 1.6 6.0 1.9 67 47 72 65 2.1 62 49 80 55 2.0 66 57 49 64 1.8 66 54 42 66 1.7 66 53 43 65 1.7 65 52 42 67 20.2 30.9 35.6 22.9 34.9 37.4 17.3 27.2 27.4 13.2 19.5 23.3 14.3 19.4 23.5 15.4 20.1 23.1 15.7 87.7 1.5 20.1 6.1 0.7 29.5 16.4 87.4 1.6 22.7 5.6 0.4 30.3 14.8 85.8 1.3 16.8 9.4 0.5 20.8 12.0 85.3 1.2 12.8 5.8 0.7 17.7 12.5 85.0 1.3 13.7 5.7 0.6 18.8 12.5 85.0 1.4 14.5 5.7 0.5 19.2 24.9 24.9 31.5 79.7 34.7 34.7 41.0 6.3 106.1 31.7 31.7 39.5 7.5 125.7 32.0 32.0 41.0 7.5 148.5 38.3 38.3 49.3 7.5 178.4 45.4 45.4 57.9 7.5 215.2 31.1 24.6 9.7 0.0 4.7 24.0 5.8 22.3 18.9 7.3 0.8 3.7 19.2 4.7 24.4 19.6 6.2 1.0 3.4 19.2 3.4 24.2 18.9 5.2 1.0 2.9 19.1 2.9 20.2 15.7 4.3 1.0 2.4 15.8 2.7 17.0 13.4 3.6 1.0 2.1 13.3 2.4 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

May 31, 2013

11

Cadila Healthcare |4QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Cadila No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 31, 2013

12