Cadila Health care Ltd

Result Update: Q3 FY 11

C.M.P: Target Price: Date:

Rs. 825.25 Rs. 940.00 April 9th 2011

BUY
SYNOPSIS

Stock Data: Sector: Face Value Rs. 52 wk. High/Low (Rs.) Volume (2 wk. Avg.) BSE Code Market Cap (Rs.In mn) Pharma 5.00 864.00/542.20 12000 532321 168961.6

Cadila Healthcare (CHL), the flagship company of the Zydus Cadila group, is the fourth largest company in the domestic pharmaceutical market.

Share Holding Pattern

During the quarter ended, the robust growth of revenue is increased by 17.75% Rs.11668.10 million. Company has acquired simayla pharma of South Africa, Africas largest and only regulated market. CRISIL has assigned a "AA+/Stable" (pronounced "double A plus with stable outlook") rating for the Rs. 2500 Million Non-convertible Debenture Programme of the Company. Cadila Healthcare Ltd has signed an Agreement with Bayer HealthCare to set up 50:50 Joint Venture Company in the name of "Bayer Zydus Pharma".

1 Year Comparative Graph

Cadila Health

BSE SENSEX

Years FY 10 FY 11E FY 12E

Net sales 36868.5 44684.1 50928.5

EBITDA 8245.8 10525.9 12050.5

Net Profit 5051.4 7039.9 8269.3

EPS 37.01 34.38 40.39

P/E 22.30 24.00 20.43

Peer Group Comparison

Name of the company Cadila Health care Dr.Reddys Labs Cipla Sun Pharma CMP(Rs.) 825.25 1631.05 318.10 441.40 Market Cap.(Rs.Mn.)
168961.6

EPS(Rs.) 31.82 57.95 12.81 12.24

P/E(x) 25.93 28.15 24.83 36.06

P/Bv(x) 13.71 4.67 4.32 7.99

Dividend (%) 100.00 225.00 100.00 275.00

276018.2 255409.3 457105.9

Company Profile
Cadila Healthcare (CHL), incorporated in 1995, is part of the Zydus Cadila Group. The company operates in areas of active pharmaceutical ingredients (API) to formulations, and animal health products to cosmeceuticals. The companys headquarter is located at Ahmedabad. CHL operates eight

manufacturing facilities out of which four formulation plants are located at Ahmedabad, Goa, Baddi and Sikkim; two APIs plants at Ankleshwar and Dabhasa; one Agiolax plant in Goa and an API plant in Mumbai to manufacture key intermediates of Pantoprazole. The Zydus Cadila Group operates in four continents spread across USA, Europe, Japan, Brazil, South Africa and 25 other emerging markets. The company has in-licensing alliances with global multinationals such as Schering AG, Boehringer Ingelheim, Viatris, etc.

Products Formulations The Company is one of the leading player that caters to various therapeutic areas such as cardiovascular, gastrointestinal, respiratory, pain management, CNS, antiinfectives, oncology, neurosciences, dermatology and nephrology segments.

Consumer product division This is a healthcare division that has brands like Sugar Free, Nutralite and Everyuth. Its sugar-free has range of sugar substitutes; Nutralite is cholesterol-free bread spread and Everyuth has range of skincare products.

Investment Highlights

Q3 FY11 Results Update Cadila Healthcare has posted 30.79% rise in consolidated net profit for the quarter ended Dec 31, 2010. It reported net profit of Rs 1696.00 million for the quarter ended Dec 31, 2010 as compared to Rs 1296.70 million in the same quarter previous year. Net sales for the quarter is surged by 17.75% to Rs.11668.10 million from Rs.9909.60 million as compared to same quarter last year. Total income has increased 17.75% from Rs 9934.20 million for the quarter ended Dec 31, 2009 to Rs 11,697.50 million for the quarter ended Dec 31, 2010. The EPS of the company is stood at Rs.8.28 for the quarter ended Dec 31, 2011.

Quarterly Results - Consolidated (Rs in mn)

As At Net sales PAT Basic EPS

Dec-10 11668.10 1696.00 8.28

Dec-09 9909.60 1296.70 9.50

%change 17.75 30.79 (12.81)

Break up of Expenditure

Received approval from USFDA Cadila Healthcare received an approval from the US FDA for its IND application of ZYGK1 for treating diabetes. Designed and developed at the Zydus Research Centre, the NME is a potent and orally administered small molecule glucokinase activator. The company will now initiate Phase-I clinical trials for ZYGK1.

Rating

CRISIL has assigned a "AA+/Stable" (pronounced "double A plus with stable outlook") rating for the Rs. 2500 Million Non-convertible Debenture Programme of the Company. This rating indicates high degree of safety with regard to timely payment of interest and principal on the instrument.

Set up of new JV Cadila Healthcare Ltd has signed an Agreement with Bayer HealthCare to set up 50:50 Joint Venture Company in the name of "Bayer Zydus Pharma" for the sales and marketing of pharmaceutical products in India.

Financials Results

12 Months Ended Profit & Loss Account (consolidated) Value(Rs.in.mn) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Exceptional Items Profit Before Tax Tax Profit After Tax Extraordinary Items Net Profit Equity capital Reserves Face value EPS
to FY11E.

FY09 12m 29274.90 203.60 29478.50 -23217.10 6261.40 -1204.80 5056.60 -1118.20 -240.80 3697.60 -665.80 3031.80 -1.00 3030.80 682.00 11670.00 5.00 22.22

FY10 12m 36868.50 159.10 37027.60 -28781.80 8245.80 -821.40 7424.40 -1338.90 -46.40 6039.10 -740.70 5298.40 -247.00 5051.40 682.40 15603.00 5.00 37.01

FY11E 12m 44674.19 126.88 44801.07 -34275.09 10525.98 -851.48 9664.55 -1305.31 0.00 8359.24 -1216.12 7143.12 -103.20 7039.92 1023.70 22746.12 5.00 34.38

FY12E 12m 50928.58 133.23 51061.80 -39011.29 12050.51 -919.60 11130.91 -1344.47 0.00 9786.44 -1419.03 8367.41 -98.04 8269.37 1023.70 31113.53 5.00 40.39

*The EPS is decline due to rise of equity capital from Rs.682.40 mn to Rs.1023.70 mn in FY10

Quarterly Ended Profit & Loss Account (consolidated) Value(Rs.in.mn) Description Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Exceptional Items Profit Before Tax Tax Profit After Tax Extraordinary items Net Profit Equity capital Face value EPS 30-Jun-10 3m 11337.90 28.70 11366.60 -8364.30 3002.30 -315.50 2686.80 -313.90 0.00 2372.90 -337.70 2035.20 -43.30 1991.90 1023.70 5.00 9.73 30-Sep-10 3m 11166.90 38.50 11205.40 -8718.40 2487.00 -160.40 2326.60 -304.40 0.00 2022.20 -253.90 1768.30 -59.90 1708.40 682.40 5.00 12.52 31-Dec-10 3m 11668.10 29.40 11697.50 -9106.40 2591.10 -193.60 2397.50 -333.50 0.00 2064.00 -368.00 1696.00 0.00 1696.00 1023.70 5.00 8.28 31-Mar-11E 3m 10501.29 30.28 10531.57 -8085.99 2445.58 -181.98 2253.65 -353.51 0.00 1900.14 -256.52 1643.62 0.00 1643.62 1023.70 5.00 8.03

Key Ratios

Particulars No. of Shares(In Million) EBITDA Margin (%) PBT Margin (%) PAT Margin (%) P/E Ratio (x) ROE (%) ROCE (%) Debt Equity Ratio EV/EBITDA (x) Book Value (Rs.) P/BV

FY09 136.4 21.39% 12.63% 10.36% 37.14 24.55% 29.49% 1.03 17.98 90.56 9.11

FY10 136.48 22.37% 16.38% 14.37% 22.3 32.53% 35.25% 0.67 13.66 119.32 6.92

FY11E 204.74 23.56% 18.71% 15.99% 24.00 30.05% 33.59% 0.48 16.05 116.10 7.11

FY12E 204.74 23.66% 19.22% 16.43% 20.43 26.04% 30.33% 0.37 14.02 156.97 5.26

Charts:

Outlook and Conclusion

At the current market price of Rs.825.25, the stock is trading at 24.00 x FY11E and 20.43 x FY12E respectively. Earning per share (EPS) of the company for the earnings for FY11E and FY12E is seen at Rs.34.38 and Rs.40.39 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 27% over 2009 to 2012E respectively. On the basis of EV/EBITDA, the stock trades at 16.05 x for FY11E and 14.02 x for FY12E. Price to Book Value of the stock is expected to be at 7.11 x and 5.26 x respectively for FY11E and FY12E. We recommend BUY in this particular scrip with a target price of Rs.940.00 for Medium to Long term investment.

Industry Overview

India is one of the fastest-growing pharmaceutical markets in the world, and its market size has nearly doubled since 2005. The Indian pharmaceutical market is expected to reach US$ 20 billion by 2015, growing at a compound annual growth rate (CAGR) of 11.7 per cent during 20052015 and establish its presence among the worlds leading 10 markets. India is also the third-largest market in the world in terms of volume and fourteenth in terms of value. India accounts for 8 per cent of global pharmaceutical production. Indian firms produce about 60,000 generic brands across 60 therapeutic categories. In addition, Indian firms manufacture approximately 500 different active pharmaceutical ingredients (APIs). Manufacturing costs in India are approximately 35 to 40 per cent of those in the US due to low installation and manufacturing costs.

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Moreover, according to an Ernst & Young and industry body study, the increasing population of the higher-income group in the country, will open a potential US$ 8 billion market for multinational companies selling costly drugs by 2015. Further, IMS Health India, which tracks drug sales in the country through a network of nationwide drug distributors, estimates the healthcare market in India to reach US$ 31.59 billion by 2020. Growth According to IMS Health, for the full year 2010, the Indian Retail Pharmaceutical Market was valued at US$ 10.2 billion, growing at 16.5 per cent over 2009. The pharmaceutical market has shown a strong double digit growth for the second successive year. As per the estimates of the Ministry of Commerce, Government of India, a whopping amount of US$ 6.31 billion will be invested in the Indian pharmaceutical industry by 2015. Also, the Indian pharmaceutical off-shoring industry is predicted to be a US$ 2.5 billion opportunity by 2012, due to the low cost of research & development (R&D) in India. According to the All India Organisation of Chemists and Druggists (AIOCD), the pharmaceuticals industry in India will grow by over 100 per cent over the next two years. "The people are increasingly becoming health conscious and the sell of all types of medicines, particularly anti-biotic, will zoom up in the coming years. We expect the business to double by 2012", as per JS Shinde, President, AIOCD. Diagnostics Outsourcing/ Clinical Trials According to the research published by RNCOS titled 'Indian Diagnostic Market Analysis', the Indian diagnostic services are projected to grow at a CAGR of more than 20 per cent during 2010-2012. Some of the major Indian pharmaceutical firms, including Sun Pharma, Cadilla Healthcare and Piramal Life Sciences, had applied for conducting clinical trials on at

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least 12 new drugs in 2010, indicating a growing interest in new drug discovery research. Generics According to MrSrikant Kumar Jena, Union Minister of State for Chemicals and Fertilisers, India tops the world in exporting generic medicines worth US$ 11 billion and currently, the Indian pharmaceutical industry is one of the world's largest and most developed. India tops the world in exporting generic medicines worth US$ 11 billion. According to McKinsey report India Pharma 2015- Unlocking the potential of Indian Pharmaceuticals market Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the pie till 2015. Moreover, as per a press release by research firm RNCOS, the report titled Booming Generics Drug Market in India' projects the Indian generic drug market to grow at a CAGR of around 17 per cent between 2010-11 and 2012-13. Government Initiatives 100 per cent foreign direct investment (FDI) is allowed under the automatic route in the drugs and pharmaceuticals sector including those involving use of recombinant technology. The Union Minister of Commerce and Industry and Minister of Trade and Industry, Singapore, have signed a Special Scheme for Registration of Generic Medicinal Products from India, which seeks to fast-track the registration process for Indian Generic medicines in Singapore. The Government had also issued an expression of interest (EoI) for technical and financial bids for the selection of a global level consultant (GLC) for the preparation of a detailed project report (DPR) in order to develop India as a drug discovery and pharma innovation hub by 2020. The Drugs and Pharmaceuticals Manufacturers Association has received an inprinciple approval for its proposed special economic zone (SEZ) for pharmaceuticals,

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bulk drugs, active pharmaceutical ingredients (APIs) and formulations to be located at Nakkapallimandal in Visakhapatnam district, according to a government press release. The Department of Pharmaceuticals has prepared a "Pharma Vision 2020" for making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose provides requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and such other measures. The government plans to open 3,000 Jan Aushadhi stores, which sell unbranded generic drugs at heavy discounts to branded drugs, in the next two years. Investment The healthcare sector has attracted growing investor support in 2010 with nearly a tenth of the total private equity funding going to this sector. In the third quarter the calendar year 2010, a total of US$ 2,047 million was invested across 88 deals, of which 9 per cent were healthcare deals, according to research firm Venture Intelligence. The potential of the rural pharmaceutical market in India has encouraged many MNCs to enhance their focus on this market. The drugs and pharmaceuticals sector has attracted FDI worth US$ 1,875.48 million between April 2000 and January 2011, according to data published by Department of Industrial Policy and Promotion (DIPP). Some of the major investment developments in the sector include:

Chandigarh-based Ind-Swift Laboratories has received approval from the Japanese Government's pharmaceutical and medical devices agency (PMDA) for the supply of Pioglitazone and Risedronate Sodium from its manufacturing facilities at Derabassi in Punjab.

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Gurgaon will now be home to the countrys first state-of-the-art laboratory that will exclusively work to design an effective vaccine against the deadly human immunodeficiency virus (HIV).The Translational Health Sciences and Technology Institute (THSTI), an autonomous institute under the department of biotechnology (DBT), and the International AIDS Vaccine Initiative (IAVI), have signed an agreement to jointly establish, operate and fund this HIV vaccine design programme.

Seven months after pulling out of the race for Singapores Parkway, Fortis Healthcare, Indias second-largest hospital chain, announced its first venture in Singapore, with a US$33 million acquisition of an under-construction specialised cancer hospital.

Panacea Biotec has signed a non-exclusive marketing agreement with Uruguay's Laboratorios Clausen SA, allowing the Latin American firm to market the Indian company's organ transplant drug, Pangraf, in Europe.

Road Ahead According to a report by PwC, India will join the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with the total value reaching US$ 50 billion.

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Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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