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Please refer to important disclosures at the end of this report 1

Y/E March (` cr) 1QFY2014 4QFY2013 % chg (qoq) 1QFY2013 % chg (yoy)Net sales 1,608 1566 2.7 1516 6.0Other income 42 55 (23.2) 88 (52.0)

Gross profit 1068 947 12.8 991 7.8

Operating profit 256 240 6.8 267 (4.0)

Net profit 196 262 (25.5) 195 0.4Source: Company, Angel Research

Cadila Healthcare (Cadila) reported lower-than-expected numbers for

1QFY2014. On the sales front, the company posted a 6.0% yoy growth in itstop-line to end the period at `1,608cr, vs our expectation of `1,820cr. On the

operating front, the margins at 16.0% came ahead of our expectation of 15.7%.

While the other income came in lower than expected, the lower-than-expected

interest expenses and taxations led the net profit to come in at `196cr vs our

expectation of `237cr during the period, posting a flat 0.4% yoy growth during

the period. We recommend a Buy with a target of `894.Below expectation results: For 1QFY2014, Cadila reported net sales of `1,608cr,up 6.0% yoy, but lower than our estimate of `1,820cr. The growth in the top-line

was subdued, as both exports and domestic sales posted a muted growth during

the period. While domestic sales grew by 8.6% yoy, exports grew by 5.0% yoy. On

the operating front, the margins dipped by 168bp yoy but came in ahead of our

expectation of 15.7%. While the other income came in lower than expected, the

lower-than-expected interest expense and taxation led the net profit to come in

at `196cr, posting a flat 0.4% yoy growth, vs our expectation of `237cr

for the period.

Outlook and valuation: We expect Cadilas net sales to post a 16.6% CAGR to`8,367cr and EPS to report an 18.1% CAGR to `44.7 over FY201315E. While,

the growth momentum has slowed down, the stock has corrected significantly,

making it attractive. We recommend a Buy on the stock with a revised targetprice of `894.Key financials (Consolidated)

Y E March (` cr) FY2012 FY2013 FY2014E FY2015ENet sales 5,090 6,155 7,123 8,367% chg 14.0 20.9 15.7 17.5

Net profit 650 655 765 915% chg (8.6) 0.8 16.7 19.7

EPS 31.7 32.0 37.3 44.7EBITDA margin (%) 17.9 15.0 15.5 15.7

P/E (x) 22.3 22.1 19.0 15.8

RoE (%) 27.4 23.3 22.9 22.9

RoCE (%) 17.3 13.2 14.0 15.2P/BV (x) 5.6 4.8 4.0 3.3

EV/Sales (x) 3.2 2.6 2.3 1.9

EV/EBITDA (x) 17.7 17.6 14.9 12.4

Source: Company, Angel Research; Note: CMP as of August 8, 2013

BUYCMP 746

Target Price 894

Investment Period 12 months

Stock Info

Sector

Bloomberg Code

Shareholding Pattern (%)

Promoters 74.8

MF / Banks / Indian Fls 13.9

FII / NRIs / OCBs 5.7

Indian Public / Others 5.6

Abs.(%) 3m 1yr 3yr

Sensex (6.0) 6.8 3.6

Cadila (11.1) (20.8) 10.3

Face Value (`)

BSE Sensex

Nifty

Reuters Code

Pharmaceutical

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

14,492

0.1

964 / 694

20,506

Net debt (`cr) 2,211

5

18,789

5,566

CADI.BO

CDH@IN

Sarabjit Kour Nangra+91 22 39357600 Ext: 6806

[email protected]

Cadila HealthcarePerformance Highlights

1QFY2014 Result Update | Pharmaceutical

August 12, 2013

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Cadila Healthcare |1QFY2014 Result Update

August 12, 2013 2

Exhibit 1:1QFY2014 performance (Consolidated)Y/E March (` cr) 1QFY2014 4QFY2013 % chg (qoq) 1QFY2013 % chg (yoy) FY2013 FY2012 % chgNet Sales 1,608 1,566 2.7 1,516 6.0 6,155 5,090 20.9Other Income 42 55 (23.2) 88 (52.0) 240 224 6.9Total Income 1,650 1,621 1.8 1,604 2.9 6,395 5,314 20.3Gross profit 1068 947 12.8 991 7.8 3835 3390 13.1

Gross margin (%) 66.5 60.5 65.4 62.3 66.6Operating profit 256 240 6.8 267 (4.0) 923 911 1.4

Operating Margin (%) 16.0 15.3 17.6 15.0 17.9Financial Cost 28 32 (11.8) 45 (38.7) 169 183 (7.7)

Depreciation 47 47 0.0 43 7.2 183 158 15.8

PBT 224 217 3.3 266 (15.8) 811 794 2.1

Tax 20 (58) (134.8) 65 (68.9) 119 113 5.7

Adj. PAT before Extra-ordinary item 204 275 (25.9) 201 1.4 692 681 1.5Exceptional loss/(gain) 0 0 0 0 3

Minority 8 13 (37.8) 6 36 29

PAT before Extra-ordinary item & MI 196 262 (25.5) 195 0.4 655 650 0.8EPS (Rs) 9.5 12.8 9.5 32.0 31.7

Source: Company, Angel Research

Exhibit 2:1QFY2014 Actual vs. Angel estimates` cr Actual Estimates VarianceNet Sales 1,608 1,820 (11.7)Operating profit 256 285 (10.0)

Tax 20 44 (53.9)

Net profit 196 237 (17.5)Source: Company, Angel Research

Revenue up 6.0% yoy, but far below our expectation

Cadila reported lower-than-expected numbers for the quarter. On the sales front,

the company posted a 6.0% growth in top-line to end the period at `1,608cr, vs

our expectation of `1,820cr. The growth in the top-line was subdued, as both

exports and domestic sales posted a muted growth during the period. While

domestic sales grew 8.6% yoy, exports grew 5.0% yoy.

Domestic sales were led by the formulation segment which grew by 7.5% yoy,

while the wellness segment grew 11.3% yoy during the quarter. The growth in the

domestic formulation market was on account of the new pricing norm. The

Management expects a `90cr impact on domestic formulation sales on account of

the same. The company expects the domestic formulation business to revive in

2HFY2014.

On the exports front, US grew by 7.9% yoy. Emerging markets, on the other hand

grew by 8.6% yoy during the period. Along with this, the other key markets like

Japan and Brazil posted a dip of 12.4% and 19.5% yoy. Absence of new product

approvals during the quarter impacted sales in the US and Brazil.

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Exhibit 3:Sales trend in the US and Europe

359367

392 388 387

85 76

11296 93

0

80

160

240

320

400

480

1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014

US Europe

(`

cr)


For 1QFY2014, the domestic segment reported an 8.6% yoy growth, with the

formulations segment registering a 7.5% yoy growth. In the Consumer Healthcare

division, Cadila continued to post a growth of 11.3% in 1QFY2013. Animal

healthcare, on the other hand, remained flat with a de-growth of 0.1% yoy.

Exhibit 4:Sales trend in Domestic Formulation and Consumer divisions582 602 570 571

625

103 97 102 108 115

0

100

200

300

400

500

600

700


Domestic Formulation Consumer division

(`

cr)


On the CRAMS front, the company generated sales of `131cr (`129cr), reporting a

growth of 1.2% yoy.

OPM dips by 168bp yoy

During the quarter, the companys gross margin dipped to 66.5%, a contraction of

109bp yoy. On the operating front, the margins dipped by 168bp yoy but came in

ahead of our expectation of 15.7%, to end the period at 16.0%. During the

quarter, the R&D expenditure was ~6.5% of net sales vs 5.8% in 1QFY2013.

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August 12, 2013 4

Exhibit 5:OPM trend

16.9

17.9

13.6

15.3

16

12

13

14

15

16

17

18


(%)


Net profit much below expectation: While the other income came in lower thanexpected, the lower-than-expected interest expense and taxation led the net profit

to come in at `196cr, posting a flat 0.4% yoy growth, vs our expectation of `237cr

during the period.

Exhibit 6:Adjusted Net p rofi t t rend

195

149

103

262

196

0

50

100

150

200

250

300


(`cr)


Concall takeaways

The Management is to revise the earlier US$3bn top-line target for FY2016 bythe end of 2QFY2014 on account of rupee depreciation. The earlier US$3bn

top-line target was based on an exchange rate of `44/US$.

The Management expects a sales impact of `90cr on the domestic formulationsales on account of the new pricing policy. The company expects the domestic

formulation business to revive in 2HFY2014.

The company has launched 20 new products in the market, of which five werefor the first time in India.

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August 12, 2013 5

The growth in the US exports was subdued, on back of lack of new products.The Management guided for 5-8 approvals in FY2014 and more in FY2015.

For FY2015, the company expects the US business to clock a 20% yoy growth.

The company has filed 5 new ANDAs in 1QFY2014 (topical - 2). Also, it haslaunched its first injectable during the quarter. The cumulative ANDA filings

stood at 173, with 79 approved and 94 pending for approvals.

Tax rate guidance reduced from 15% of PBT in FY2014.

Recommendation rationale

Strong domestic portfolio: Cadila is the fifth largest player in the domestic market,with sales of about `2,987cr in FY2013, ~48% 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 MRs. The company, on an aggressive front, launchedmore than 90 new products in FY2013, including line extensions, of which 10 were

for the first time.

During FY2008-13, the company reported a ~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 its 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 above-industry rate

on the back of new product launches and field force expansion. While FY2014,

sales would be lower, however FY2015 should witness strong sales growth. During

FY2013-15E, we expect the domestic segment to grow at a CAGR of 12.4%.

Exports on a strong footing: Cadila has a two-fold focus on exports, wherein it istargeting 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.

Growth in US exports will be subdued in FY2014, on back of lack of new productsalong with price erosion among its key products and with just 5-8 approvals.

However, in FY2015, the region is expected to post a growth of 20% on back of 20

approvals. In Europe, the companys growth going forward would be driven by

new product launches and improvement in margin by product transfer to Indian

facilities. Among emerging markets, Cadila is aggressively targeting Brazil and the

CIS region. Overall, we expect the exports to grow at a CAGR of 19.6% during the

period.

Outlook and valuation

We expect Cadilas net sales to post a 16.6% CAGR to `8,367cr and EPS to report

an 18.1% CAGR to `44.7 over FY201315E. While the growth momentum has

slowed down, the stock has corrected significantly, making it attractive. We

recommend a Buy with a revised target price of `894.

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Exhibit 7:Key AssumptionsKey assumptions FY2014E FY2015EDomestic growth (%) 10.0 15.0

Exports growth (%) 8.0 20.0Growth in employee expenses (%) 15.7 17.5

Operating margins (excl tech. know-how fees) (%) 15.5 15.5

Capex (` cr) 650 650


Exhibit 8:One-year forward PE band

-

20 0

40 0

60 080 0

1,000

1,200

1,400

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

Jul-13

Price 7x 14x 21x 28x


Company Background: Cadila Healthcares operations range from API toformulations, animal health products and cosmeceuticals. The group has global

operations in four continents spread across USA, Europe, Japan, Brazil, South

Africa and 25 other emerging markets. Having already achieved the US$1bn mark

in 2011, we shall achieve sales of over US$3bn by 2015 and be a research-driven

pharmaceutical company by 2020.

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August 12, 2013 7

Exhibit 9:Recommendation SummaryCompany Reco CMP Tgt. price Upside FY2015E FY13-15E FY2015E

(`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)Alembic Pharma. Accumulate 156 165 5.9 11.2 1.5 7.8 25.5 34.2 34.7Aurobindo Pharma Buy 161 242 50.0 7.8 1.0 6.1 26.4 13.1 18.9

Cadila Healthcare Buy 708 894 26.3 15.8 2.0 12.7 18.1 15.2 22.9Cipla Buy 411 477 16.1 17.3 2.7 11.9 12.1 16.8 16..8

Dr Reddy's Accumulate 2,218 2,535 14.3 17.5 2.5 12.5 10.8 18.3 21.8

Dishman Pharma Buy 43 73 70.0 2.6 0.8 3.5 16.3 11.4 11.0

GSK Pharma* Neutral 2,331 - - 35.0 5.9 25.0 (7.3) 30.6 27.5

Indoco Remedies Buy 64 78 21.7 8.4 0.8 5.6 28.0 15.0 14.4

Ipca labs Neutral 643 - - 14.3 2.2 10.2 29.1 25.1 25.7

Lupin Accumulate 801 904 12.8 18.6 2.6 11.9 21.0 29.0 25.8

Ranbaxy* Buy 359 384 6.8 16.0 1.2 9.2 (2.2) 9.7 19.2

Sanofi India* Neutral 2,479 - - 24.4 2.3 15.0 15.0 14.7 17.1

Sun Pharma Neutral 507 - - 25.5 5.9 14.5 8.8 29.4 22.0

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

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August 12, 2013 8

Profit & Loss statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EGross sales 3,614 4,521 5,181 6,285 7,195 8,452Less: Excise duty 40 56 91 129 72 85Net sales 3,574 4,465 5,090 6,155 7,123 8,367Other operating income 113 166 173 203 203 203

Total operating income 3,687 4,630 5,263 6,358 7,326 8,570% chg 25.9 25.6 13.7 20.8 15.2 17.0

Total expenditure 2,881 3,604 4,179 5,232 6,019 7,055

Net raw materials 1,178 1,475 1,679 2,320 2,685 3,138

Other mfg costs 150 162 320 387 447 526

Personnel 393 549 751 903 1,045 1,228

Other 1,159 1,417 1,429 1,622 1,842 2,163

EBITDA 694 861 911 923 1,104 1,313% chg 28.3 24.1 5.8 1.4 19.6 19.0

(% of Net Sales) 19.4 19.3 17.9 15.0 15.5 15.7

Depreciation& amortisation 134 127 158 183 221 254

EBIT 560 734 753 740 882 1,059% chg 30.5 31.1 2.6 (1.7) 19.2 20.0

(% of Net Sales) 15.7 16.4 14.8 12.0 12.4 12.7

Interest & other charges 82 70 185 169 180 180

Other income 16 13 53 37 37 37

(% of PBT) 3 2 7 5 4 3

Recurring PBT 606 842 794 811 942 1,119% chg 53.9 39.0 (5.7) 2.1 16.2 18.8

Extraordinary expense/(Inc.) 5 - 3 - - -

PBT (reported) 602 842 794 811 942 1,119Tax 74.1 106.4 113.0 119.5 141.3 167.9

(% of PBT) 12.3 12.6 14.2 14.7 15.0 15.0

PAT (reported) 527 736 681 692 801 951Less: Minority interest (MI) 22.9 25.1 28.6 36.4 36.4 36.4

PAT after MI (reported) 505 711 653 655 765 915ADJ. PAT 509 711 650 655 765 915% chg 55.5 39.6 (8.6) 0.8 16.7 19.7

(% of Net Sales) 14.1 15.9 12.8 10.6 10.7 10.9Adj.Basic EPS (`) 24.9 34.7 31.7 32.0 37.3 44.7Adj. Fully Diluted EPS ( ) 24.9 34.7 31.7 32.0 37.3 44.7% chg 3.6 39.6 (8.6) 0.8 16.7 19.7

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August 12, 2013 9

Balance Sheet (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015ESOURCES OF FUNDSEquity share capital 68 102 102 102 102 102Reserves & Surplus 1,560 2,069 2,471 2,938 3,527 4,267

Shareholders funds 1,629 2,171 2,574 3,041 3,631 4,371Minority interest 39 67 90 119 156 192Total loans 1,091 1,092 2,289 2,681 2,681 2,681

Other Long Term Liabilities 19 43 47 43 43

Long Term Provisions 62 79 64 76 76

Deferred tax liability 114 113 119 100 119 119

Total liabilities 2,872 3,523 5,193 6,054 6,587 7,363APPLICATION OF FUNDSGross block 2,074 2,317 3,008 4,105 4,755 5,405

Less: Acc. depreciation 873 969 1,175 1,358 1,579 1,833

Net block 1,201 1,348 1,833 2,747 3,176 3,572Capital Work-in-Progress 248 431 484 248 248 248

Goodwill 484 484 1,015 862 862 862

Investments 21 21 24 21 21 21Long Term Loans and Adv. 201 263 411 314 363

Current assets 1,775 2,125 2,760 3,191 3,673 4,247

Cash 251 295 467 582 507 594

Loans & advances 307 411 275 279 341 334

Other 1,217 1,420 2,019 2,330 2,825 3,319

Current liabilities 866 1,087 1,186 1,426 1,707 1,950Net Current assets 909 1,038 1,574 1,765 1,966 2,297Mis. Exp. not written off 10 - - - - -

Total assets 2,872 3,523 5,193 6,054 6,587 7,363

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August 12, 2013 10

Cash Flow Statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EProfit before tax 602 842 794 811 942 1,119

Depreciation 134 127 158 183 221 254(Inc)/Dec in Working Capital 3 (286) (427) (223) (179) (293)

Less: Other income 16 13 53 37 37 37

Direct taxes paid 77 106 113 119 141 168

Cash Flow from Operations 646 564 359 614 806 875(Inc.)/Dec.in Fixed Assets (299) (291) (743) (861) (650) (650)

(Inc.)/Dec. in Investments (84) (0) (4) 3 - -

Other income 16 13 53 37 37 37

Cash Flow from Investing (368) (278) (694) (821) (613) (613)Issue of Equity - - - - - -

Inc./(Dec.) in loans (177) 7 1,238 382 7 -

Dividend Paid (Incl. Tax) 75 (176) (175) (175) (175) (175)

Others (177) (72) (557) 115 (100) 1

Cash Flow from Financing (279) (242) 506 322 (268) (175)Inc./(Dec.) in Cash (1) 45 171 115 (75) 87

Opening Cash balances 252 251 295 467 582 507Closing Cash balances 251 295 467 582 507 594

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August 12, 2013 11

Key Ratios

Y/E March FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EValuation Ratio (x)P/E (on FDEPS) 28.5 20.4 22.3 22.1 19.0 15.8P/CEPS 22.5 17.3 17.9 17.3 14.7 12.4

P/BV 8.9 6.7 5.6 4.8 4.0 3.3

Dividend yield (%) 0.0 0.9 1.1 1.1 1.1 1.1

EV/Sales 4.3 3.4 3.2 2.6 2.3 1.9

EV/EBITDA 22.1 17.6 17.7 17.6 14.9 12.4

EV / Total Assets 5.3 4.3 3.1 2.7 2.5 2.2

Per Share Data (`)EPS (Basic) 24.9 34.7 31.7 32.0 37.3 44.7

EPS (fully diluted) 24.9 34.7 31.7 32.0 37.3 44.7

Cash EPS 31.5 41.0 39.5 41.0 48.3 57.2

DPS - 6.3 7.5 7.5 7.5 7.5

Book Value 79.7 106.1 125.7 148.5 177.4 213.5

Dupont AnalysisEBIT margin 15.7 16.4 14.8 12.0 12.4 12.7

Tax retention ratio 87.7 87.4 85.8 85.3 85.0 85.0

Asset turnover (x) 1.5 1.6 1.3 1.2 1.3 1.3

ROIC (Post-tax) 20.1 22.7 16.8 12.8 13.4 14.4

Cost of Debt (Post Tax) 6.1 5.6 9.4 5.8 5.7 5.7

Leverage (x) 0.7 0.4 0.5 0.7 0.6 0.5

Operating ROE 29.5 30.3 20.8 17.7 18.3 19.0

Returns (%)ROCE (Pre-tax) 20.2 22.9 17.3 13.2 14.0 15.2

Angel ROIC (Pre-tax) 30.9 34.9 27.2 19.5 18.9 19.9

ROE 35.6 37.4 27.4 23.3 22.9 22.9

Turnover ratios (x)Asset Turnover (Gross Block) 1.9 2.1 2.0 1.8 1.7 1.7

Inventory / Sales (days) 67 62 66 66 66 65

Receivables (days) 47 49 57 54 53 52

Payables (days) 72 80 49 42 43 42

WC cycle (ex-cash) (days) 65 55 64 66 66 67

Solvency ratios (x)Net debt to equity 0.5 0.4 0.7 0.7 0.6 0.5

Net debt to EBITDA 1.2 0.9 2.0 2.3 2.0 1.6

Interest Coverage (EBIT / Int.) 6.8 10.5 4.1 4.4 4.9 5.9

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August 12 2013 12

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Cadila

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Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

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Cadila, 1Q FY 2014