Reuters: CADI.NS; Bloomberg: CDH IN Valuations Attractive BUY · 2019-07-09 · Institutional Equities erage Reuters: CADI.NS; Bloomberg: CDH IN Cadila Healthcare Earnings On A High

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Reuters: CADI.NS; Bloomberg: CDH IN

Cadila Healthcare

Earnings On A High Base – Valuations Attractive We initiate coverage on Cadila Healthcare limited (Cadila) with a Buy rating and target price of Rs315 based on 20x FY21E EPS. Earnings growth though is likely to be muted over next two years but valuations are favorable as stock has corrected about 30% from its recent levels after its largest manufacturing plant Moraiya received form 483 observations. Cadila has lowered its dependence on Moraiya for new approvals. In case the plant is given an OAI status, Cadila still expects 20-30 new approvals coming from other plants, of which 10 should be limited competition. Most of its transdermal filings will also not be impacted. Company is favorably progressing in its efforts to build alternative growth platform (NCE, Biologics and Vaccines) which should start delivering FY21 onwards and reduce Cadila dependence on limited competition assets in US for its earnings.. Zydus wellness and domestic portfolio should grow high single digits to mid-teens and will deliver margin expansion too.

Potential of earnings growth

Recent restructuring in domestic business (30% of sales) to help margins and rejuvenate growth: Cadila has recently completed a restructuring exercise for its domestic business as it intends to focus on larger brands and therapeutic segments with better growth prospects. FY20 will see the impact of this in terms of better growth and margins. We are building a 11% growth for the domestic portfolio, which was down to single digits in FY19

Wellness business (13% of sales) gaining proportion with Heinz acquisition: The acquired Heinz portfolio represents low growth assets, but provides to Zydus an expanded footprint which it will leverage to improve growth of its traditional brands (Sugar Free / Nutralite). We expect high single-digit growth for the wellness portfolio.

US business (45% of sales) on a high base – Key products to decelerate – Moraiya compliance woes dampen sentiments: Key limited competition portfolio assets in the US for Cadila which include recent launches gLialda, gAsacol HD and Levorphanol (part of sentynl acquisition) contribute almost 30-35% of its US sales, and almost 45% of net earnings (estimated.). gLialda and Levorphanol (20% of US sales, estimated.) sales are declining as new players are gaining approval. In FY20, 10-12 new meaningful launches are expected (apart from Moraiya) in the US which should more or less offset the decline. We expect approvals from Moraiya to stall for 12-15 months as we expect an Official Action Indicated status (OAI) by the USFDA

New chemical entity pipeline remains a free call option: Saroglitazar and Desidustat are exciting NCE candidates in Cadila pipeline and have shown positive clinical data. Saroglitazar is undergoing global Phase II development in Non-Alcoholic Fatty liver disease (NAFLD), Primary Biliary Cholangitis (PBC) and Hypertriglyceridemia while desidustat is currently in Phase III stage for Indian markets in Anemia associated with chronic kidney disease. Desidustat belongs to a novel class (HIF-PH inhibitors) and competing drugs in pipeline with the same MoA as desidustat have shown very encouraging clinical profile in global Phase-3 trials, which raises our optimism on its potential.

Valuation based on various scenarios – Regulatory status at Moraiya: 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.

BUY

Sector: Pharmaceuticals

CMP: Rs247

Target Price: Rs315

Upside: 28%

Vishal Manchanda Research Analyst [email protected] +91 9737437148

Key Data

Current Shares O/S (mn) 1,023.7

Mkt Cap (Rsbn/US$bn) 251.5/3.6

52 Wk H / L (Rs) 433/242

Daily Vol. (3M NSE Avg.) 2,525,862

Share holding (%) 2QFY19 3QFY19 4QFY19

Promoter 74.8 74.8 74.8

Institutions 17.3 17.3 17.3

Non-Institutions 7.9 7.9 7.9

One-Year Indexed Stock Performance

60

70

80

90

100

110

120

Feb-19 Mar-19 Mar-19 Apr-19 May-19 Jun-19

CADILA HEALTHCARE Nifty 50

Price Performance (%)

1 M 6 M 1 Yr

Cadila Healthcare (17.9) (29.7) (31.0)

Nifty Index 3.0 10.8 10.0

Source: Bloomberg

Y/E March (Rsmn) FY17 FY18 FY19 FY20E FY21E

Net sales 95,723 119,364 131,656 145,820 154,191

EBITDA 19,044 28,475 29,731 28,565 29,356

Net profit 14,863 17,664 18,518 15,488 16,235

EPS (Rs) 15 17 18 15 16

EPS growth (%) (2) 19 4 (17) 4

EBITDA margin (%) 19.9 23.9 22.6 19.6 19.0

PER (x) 50.5 42.3 14.5 17.4 16.6

P/BV (x) 10.8 8.6 2.6 2.3 2.1

EV/EBITDA (x) 41.3 27.7 11.2 11.2 10.8

RoCE (%) 17.6 22.1 17.1 15.5 15.7

RoE (%) 21.4 20.2 17.8 13.4 12.8

Source: Company, Nirmal Bang Institutional Equities Research

7 June 2019


Cadila Healthcare 2

India domestic brand business – restructuring to rejuvenate growth

29% of Cadila group sales are derived from branded formulation sales in domestic markets. The contribution of Indian markets fell from 34% in FY17 on account of faster growth in US sales. Cadila is ranked fourth largest player in the Indian branded formulation space with 3.94% market share. About 25-30% of Cadila domestic sales are from formulations which are under price control. Going forward, the key focus areas for the company in domestic markets are:

1. Building Megabrands: The company has sixteen brands featuring in the top 300, of which five have sales in excess of Rs100 crore. Besides the larger brands, there is a large tail of non-performing SKU’s which is contributing to inefficiencies in manufacturing and in sales and distribution. Cadila has recently completed a portfolio restructuring to hive off these tail brands. The intention is to improve operational efficiency and focus sales force effort on large brands and high growth segments. Prior to going for full portfolio rationalization it experimented in limited geographies which yielded positive results and they opted for a full scale exercise.

Exhibit 1: New Launches in Domestic (Indian Markets)

Year Total New

Launches

First in India

Launches

Domestic Sales

for Cadila %Growth Comments

FY-18 64 10 33,324 6%* GST related de-stocking impacted growth

FY-17 75 17 32,442 9%

NPPA orders on price control and FDC ban

impacted growth offset by acquisition of brands

from MSD and AstraZeneca

FY-16 40 10 29,732 11%


*Adjusted for GST Impact

Exhibit 2: Revenue Trend of India Business

24,004 26,341

29,945 32,441 33,325

35,338 39,225

43,540

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Rsmn)

India Source: Company, Nirmal Bang Institutional Equities Research


Cadila Healthcare 3

Exhibit 3: Therapeutic area-wise breakup of formulations sales in India

7.5%

8.0%

9.3%

10.8%

11.3%13.8%

16.3%

23.0%

Dermatology Gynaecology Pain ManagementRespiratory Gastro Intestinal CadiacAnti-Infective Others

Source: AIOCD AWACS MAT March 2018, Nirmal Bang Institutional Equities Research

The company has a dominant position in the promoted covered market of gynaecology, respiratory, pain management, cardiovascular, dermatology and gastrointestinal therapeutic areas, where it is ranked among the top three players. The restructuring efforts will focus to expand growth in these categories.

2. Scale up Biologics and Vaccine business: Cadila is an early entrant in the biologics and vaccine space. Cadila is the largest player in domestic markets in biosimilar category. It has the largest portfolio of launched biosimilars whose cumulative sales aggregate to Rs 2,500mn annually. The vaccine business has been traditionally dominated by a few players and Cadila is trying to build a meaningful presence by creating a portfolio of vaccines which include quite a few niche one’s with limited competition.

Biosimilar launches in India: Cadila has launched 10 biosimilars in India over the last three years. These include G-CSF /filgrastim (oncology), Peg G-CSF/pegfilgrastim (oncology), IFN a-2b (infectious diseases), Teriparatide (osteoporosis), Adalimumab (inflammation), Trastuzumab (oncology), Peg IFN a-2B (infectious diseases), EPO (oncology/nephrology) and Bevacizumab (oncology).

Exhibit 4: Biosimilars Launches in Emerging Markets

Biosimilars Geography Year of Launch

Pegylated Interferon alpha 2b Myanmar FY-16

Erythropoietin alfa Myanmar FY-17

Filgrastim and Pegfilgrastim Sri Lanka and Philippines FY-18



Cadila Healthcare 4

Exhibit 5: Bio-similar Pipeline

Sr No Bio-similars Therapeutic Area Status

1 IFNα-2b PEGIHEP Hepatitis B & C Launched

2 PEG-IFN (Pegylated interferon alpha 2b – PEGIHEP) Hepatitis B & C Launched

3 PTH (Bonemax) Osteoporosis Launched

4 G-CSF Oncology Launched

5 PEGG-CSF Oncology Launched

6 EPO Onco / Nephro Launched

7 Adalimumab (Exemptia) Inflammation Launched

8 Trastuzumab (Vivitra) Oncology Launched

9 Bevacizumab (Bryxta) Oncology Launched

10 Peg Asparagase Oncology Launched

11 r-FSH Fertility Launched

12 ZRC-3160 Oncology Regulatory Permission

13 ZRC-3268 Osteoporosis Pre Clinical

14 ZRC-3276 Oncology Pre Clinical

15 ZRC-3277 Oncology Pre Clinical

16 ZRC-3189 Myocardial Cloning

17 ZRC-3287 Nephrology Pre Clinical

18 ZRC-3185 Ophthalmology Cloning

19 ZRC-3286 Inflammation Cloning

20 ZRC-3296 Oncology Cloning

21 ZRC-3256 Oncology Regulatory Permission


3. Vaccine business will take longer to scale up: The vaccine business of Cadila healthcare is currently in its infancy with sales of around Rs500mn. Cadila has approval for 10 vaccines of which four have been launched. The marketed portfolio includes a vaccine for Rabies, Typhoid (polysaccharide), Typhoid (conjugated), tetravalent influenza and Tuberculosis. Zydus is the only second company in the world to launch a tetravalent influenza vaccine (Vaxiflu). It provides protection from the four influenza viruses - H1N1, H3N2, Type B (Brisbane) and Type B (Phuket). Cadila tetravalent flu vaccine (Vaxiflu) and Rabies vaccine have received WHO prequalification.

Exhibit 6: Vaccines Pipeline

Sr. No Vaccines Status

1 Measles Launched

2 Tetanus toxoid ` Launched

3 DTwP Launched

4 MMR Launched

5 Tetravalent Influenza# Launched

6 Typhoid polysaccharide# Launched

7 Conjugated Vaccine for Typhoid Launched

8 Varicella Launched

9 Anti rabies Launched

10 Tetanus (Adsorbed) I.P. Launched

11 MR Phase 3

12 Pentavalent (DTP-Hib-HepB) Phase 2

13 MMRV Phase 1

14 HPV Phase 1

15 Hepatitis B Phase 1

16 Haemophilus Type B Conjugate Phase 1

17 Hepatitis A Phase 1

18 Hepatitis E Pre Clinical

19 Chikungunya Pre Clinical



Cadila Healthcare 5

US business scale up

The US markets represent 50-55% of company sales. Over the past two years, Cadila was able to build its presence in the US with a sales growth of 50%. In the most recent quarter (4QFY19), sales to the US market aggregated to US$253mn.

The ramp-up in the US is driven by monetization of limited competition portfolio through the launch of Asacol HD and Lialda. Cadila has also benefitted from select drug shortages in the US (Atenolol). We estimate Asacol, HD, Lialda and levorphanol (part of Sentynl acquisition) contribute to 35% of Cadila US sales and about 45% of company net earnings. We have seen incremental competition entering in gLialda and levorphanol which is expected to erode 50% of existing sales from these products by FY20. The company guiding for 30 approvals in FY20 should offset any erosion in the base business. Asacol HD which is also a large contributor may remain protected from incremental competition until 2021 (patent expiry) as there are no known Para IV filers.

Exhibit 7: Revenue Trend of US Business

21,180

33,139

40,571 37,091

58,348 62,795 61,720 63,072

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Rsmn)

USA Source: Company, Nirmal Bang Institutional Equities Research

Can new Approvals offset the erosion in base business?

Cadila expects 20-30 new approvals annually in the US and according to them these should allow them more than offset the erosion in base portfolio. The new approvals would also include approval for transdermal patches.

Duragesic (Fentanyl patch): Duragesic represents crowded markets with 7 players including innovator competing for a share. We estimate the market opportunity to be approximate US$200mn. Cadila is yet to gain approval from the USFDA.

Exelon Patch (Rivastigmine): We estimate the market opportunity for a rivastigmine patch to be approximate US$120mn and there are four generic players (including Cadila) that already have approval. Rivastigmine patch may add US$20mn at peak to Cadila sales (around FY21).

Estradiol Patch Market: We estimate the estradiol patch market opportunity at US$400mn and is divided between various brands which include Minivelle, Vivelle dot, Menostar, and Climara. Minivelle is currently protected by patents which will expire in 2030. Mylan and Sandoz is the large generic player that market copies of Climara and Vivelle dot. We estimate Cadila is targeting Climara and Vivelle dot, which together may represent US$300mn market. Assuming a 15% market share, the estradiol patch can add about US$40mn to Cadila sales.

Catapres TTS (Clonidine): Clonidine patch – Clonidine patch is a relatively smaller opportunity (about 90mn in annual sales) with about four generic players already on the market. Among the generic players which have an approval include – Mylan, Mayne, Teva, and Aveva


Cadila Healthcare 6

Lidoderm (Lidocaine): Lidoderm represents a US$1bn market opportunity and currently there are two generic players which have an approval. Besides Scilex pharma markets a 505(b)(2) version of lidocaine patch, has benefits over traditional brand (Lidoderm) in terms of superior adhesion and comparable therapeutic effect at lower dosages.

Emerging markets and LATAM markets can deliver mid-teens growth on a low base:

Emerging markets and LATAM markets (Brazil and Mexico) represent about 6% of Cadila sales. In the LATAM markets, the company has a presence in Brazil and Mexico, while EMs operates in some countries of Asia Pacific, Middle East, and Africa. The profit contribution across the geographies is currently negligible due to subscale operations and focus on branded generics. We believe the company lacks critical mass in terms of efforts which are needed to broaden these geographies. With regard to emerging markets, Cadila is entering into alliances for the launch of biosimilars in geographies like Turkey, Russia, Indonesia, and Columbia.

Exhibit 8: Emerging Markets and LATAM Markets Snapshot

Revenues FY15 FY16 FY17 FY18

Latin America market 2,348 2,177 2,445 2,605

% Growth - -9% 12% 7%

Emerging Markets 4,075 4,760 5,056 5,014

% Growth - 17% 6% -1%

New Launches

Brazil - 2 2 3

Mexico 7 2 5 4

Emerging Markets 20 8 9 10


Zydus Wellness Limited (ZWL): Acquisition of Heinz portfolio will take longer to reflect on earnings

The acquisition of Heinz will enhance ZWL's portfolio, triple its revenue, and double its operating profit from fiscal 2020. Through the acquisition, ZWL will diversify its product profile and add Glucon-D, Complan, Nycil, and Sampriti ghee having a total revenue of Rs1,150 crore (for 12 months ended 30 June 2018). The proforma revenues and EBITDA of the consolidated entity are Rs16,500mn and Rs3,500mn respectively. The acquisition will allow ZWL to expand its existing product basket (Sugar-free, Everyuth, Nutralite brands) over a larger geographic footprint. We anticipate the benefits of the acquisition to start pouring from FY21. Since the acquired brands have a lower operating margin, the blended operating margin of the combined entity would fall to around 21%.

Revenue synergies: The acquisition is expected to provide ZWL a massive expansion in footprint which extends to geographies outside India too, enabling ZWL to scale up its international operations too which are currently only single digit percentage of its overall revenues. In addition, ZWL may be able to leverage its pharmacy chain network for boosting sales of Heinz portfolio. About 18% of health drink sales are routed through the pharmacy chain network, which can be leveraged for growth in Complan brand.

In addition, Heinz India is particularly strong in West Bengal and Tamil Nadu, which gives 30% of its sales from Complan.


Cadila Healthcare 7

Exhibit 9: Revenue Trend of Zydus Wellness Business

4,236 4,249 4,830 4,593 4,919

8,076

17,821* 18,712

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

E

FY

21

E

(Rsmn)

Zydus Wellness Source: Company, Nirmal Bang Institutional Equities Research

*The revenues of Zydus Wellness include partial inclusion of acquired Heinz portfolio revenue in FY19 and full inclusion from FY20

Acquired brands have seen a poor uptake in the last few years: Heinz sales performance has been dismal over the last few years. From Rs1,2370mn in FY16, sales in FY18 were just Rs11,300mn which includes the unfavourable impact of GST implementation in FY18. The health drink market is seeing a slow down as volumes have remained stagnant since FY16. While volumes are seeing saturation, there is a slew of new players trying to build a share of this pie. Nestle and value players like Amul and Patanjali are aggressively pricing their portfolio as they look to entrench this large pie worth US$860mn.

Relative Valuation Comparison (Heinz to GSK Consumer Healthcare): The Heinz divestment deal is very similar to the GSK consumer healthcare divestment deal. Relative deal valuation suggests, Heinz has come cheaper to Zydus Wellness. The Heinz brands fetched Rs4,5950mn, which implies a price to sales ratio works out to 4 times and the enterprise value/EBITDA ratio is 20x. GSK Consumer’s respective figures are 6.6x and 30x.

Existing portfolio of Zydus Wellness is on a strong footing

Sugar Free (94% market share and expanding the market):

1. ZWL offers sugar substitutes in five variants —Sugar Free Natura (Sucralose based), Sugar Free Gold (Aspartame based), Sugar Free Green (Stevia leaves based), Sugar Free Green – Veda and Sugar Free lite. Sugar Free ‘Green’, Sugar Free Green Veda and Sugarlite are the recent launches.

2. Sugar Free Green is positioned as a 100% natural substitute as it is derived from Stevia leaves was launched in March 2017. Stevia leaves are approved by the WHO, USFDA and FSSAI as a safe artificial sweetener and the product intend to expand the market to health-conscious population.

3. Sugar Free Green—Veda, a new variant under the Green flagship has been launched in FY19, with 100% natural extracts of Elachi, Tulsi, and lemon to make the tabletop beverages like tea, healthy, but without the calorie.

4. SugarLite is a smart sugar made from a blend of sugar and Stevia leaves and intended for the health conscious people. It has 50% lower calories than normal sugar.


Cadila Healthcare 8

Skin Care: Everyuth

1. ZWL is consistently expanding the skin care portfolio with new launches. In addition to its traditional Everyuth Scrubs and Everyuth Peeloffs, it has introduced Everyuth Face wash and the most recent offering being Everyuth tan removal scrub & face pack. Everyuth is the market leader for face scrub and peel-off segments with a market share of 33.6% and 86% respectively at the end of FY18. ZWL is losing lost market share in the face peel off the segment and has declined from ~92% in FY17 to ~86% in FY18.

2. The scrub segment in India is showing improved market demand. The market is growing double-digit as against single-digit growth in FY17. ZWL has gained market share which is now at ~33.6% in FY17 as against 33% in FY-17.

Nutralite

1. Positioned as a healthier option to butter, Nutralite range of products are free from cholesterol, trans fats, and enriched with Omega 3 and Vitamin A, D and E

2. There are two variants - Nutralite, butter substitute and Nutralite Mayonnaise. Institutional sales contribute to 70% of Nutralite butter sales. Nutralite ‘Mayonnaise’ which has been recently launched in 3Q of FY18.

International foray:

ZWL forayed in International markets in FY17 and currently selling its portfolio brands in African, South East Asian & SAAR regions. Export as a percentage of sales is currently low (single-digit), however, it has enormous potential to scale up. ZWL is leveraging on its sugar free brand as entry level product and the range would be eventually expanded to include Nutralite and EverYuth brand offerings.


Cadila Healthcare 9

NCE Portfolio of Cadila can be a game changer but still a long way to go

Saroglitazar: A differentiated dual PPAR α/γ agonists that needs to be backed with long term safety Saroglitazar (Lipaglyn) is a dual PPAR α/γ agonist drug approved in India by Drug Controller General of India for the treatment of diabetic dyslipidemia and hypertriglyceridemia with T2DM not controlled by statin therapy. It is the first drug in this novel group of dual PPAR α/γ agonists (glitazars) to be approved and clinically used, anywhere in the world.

Exhibit 10: Saroglitazar - Global Development Status

Indication Clinical Status

Geography Comments Data Read

Out

Hypertriglyceridemia Approved India - NA

Diabetic Dyslipidemia Approved India - NA

Lipodystrophy Phase III India - NA

NASH Phase III India - NA

Type 2 diabetes Phase III India - NA

Hypertriglyceridemia Phase II US In patients with fasting Triglyceride levels are > 500mg/dl 1QCY20

NASH Phase II US Nonalcoholic steatohepatitis (NASH) is liver inflammation and damage caused by a buildup of fat in the liver.

1QCY20

Primary Billary Cholangitis Phase II US

PBC is a liver disease caused due to the progressive destruction of the bile ducts in the liver, resulting in cholestasis characterized by the reduction of bile flow, which can lead to build-up of toxic bile in the liver and end in liver inflammation and fibrosis.

3QCY19


Exhibit 11: Peroxisome Proliferator-activated receptor pathway diagram

Source: Wikipedia


Cadila Healthcare 10

Saroglitazar belongs to a tainted class: So far all Dual PPAR α/γ Agonists have shown safety risks and have been discontinued by regulators. Historically, all drugs that belong to the class - Dual PPAR α/γ agonists have failed to successfully reach the market. These drugs were discontinued for one or the other safety reasons. The list lists of drugs that have failed are discussed as under:

Exhibit 12: Dual PPAR α/γ agonists that failed during clinical development

Compound Targeted disease Current Status

Muraglitazar Metabolic disorders, type 2 diabetes Discontinued in 2006 due to adverse CV events (myocardial infarction,

stroke, heart failure, and transient ischemic attack)

Ragaglitazar Type 2 diabetes Discontinued in 2004 due to weight gain, edema, anemia, and urothelial

cancer

Tesaglitazar Type 1 diabetes, type 2 diabetes, cardiac arrhythmia,

and lipid metabolic disorder

Discontinued in 2006 due to elevated creatinine, lowered GFR, weight gain,

anemia, and leucopenia

Naveglitazar Cardiovascular disease, Dyslipidemia, and type 2

diabetes Further development has been stopped

Farglitazar Type 2 diabetes Discontinued in 2003

Imiglitaazar Type 2 diabetes Discontinued in 2004 due to abnormalities in liver enzyme tests

Aleglitazar Type 2 diabetes Discontinued in 2013 due to adverse events like heart failure,

gastrointestinal bleeding, and renal dysfunction


Phase-3 evidence on Saroglitazar suggests it is differentiated from its peers (based on limited trial data): In phase 3 trials, Saroglitazar has not shown any of the typical safety issues that have been associated with the class of drugs, but regulators are likely to push for long term studies in a larger population for reviewing an NDA filing.

Exhibit 13: Safety Comparison - Saroglitazar vs Peers

Condition Saroglitazar Association in Phase-3

studies Comments

Weight Gain No Non significant.

Edema No Muraglitazar, Tesaglitazar, Ragaglitazar and Aleglitazar have shown Edema. In one of the studies mild peripheral edema was reported with lower dose of saroglitazar.

Carcinogenicity No Ragaglitazar was discontinued for carcinogenicity. Saroglitazar carcinogenicity is evaluated in

Renal Dysfunction No There is a very mild increase in serum creatinine seen with saroglitazar. Other dual PPAR agonists had a much sharper increase. We believe regulators will seek incremental evidence in larger population and over longer term.

Cardiovascular Safety No Has not shown any signal of cardiac safety in trials

Liver Enzyme Elevations No Saroglitazar is being evaluated as a treatment in various liver disease




1) Saroglitazar is mechanistically differentiated from other failed drugs in the class: Saroglitazar is predominantly a PPAR α agonist, with modest PPAR γ agonist actions. This is in contrast to previously developed dual PPAR α/γ agonists, like muraglitazar, aleglitazar, and tesaglitazar, which had either predominantly PPAR γ agonistic activity or equivocal agonistic activity on both PPAR α and PPAR γ receptors.

2) Clinical data has not shown the same risks as found in other drugs of the same class: Thus, in both phase II and phase III clinical trials, saroglitazar was effective in controlling both dyslipidemia and glycemic parameters. It was found to be devoid of conventional adverse events of typical PPAR α agonist agents (like reduced glomerular filtration rate, increased myopathy with statins, and hepatotoxicity), as well as of PPAR γ agonist agents (like edema, weight gain, and congestive heart failure).

Saroglitazar in type 2 diabetic dyslipidemia patients – PRESS V STUDY: The PRESS V study was aimed to evaluate the safety, tolerability, and efficacy of saroglitazar 2 mg and 4 mg capsules as compared to high dose pioglitazone in patients with diabetic dyslipidemia. In this 26-week double-blind, parallel arm phase-3 study patients with hypertriglyceridemia with type 2 diabetes mellitus were enrolled from 14 sites in India.

Exhibit 14: PRESS V Study in Diabetic Dyslipidemia % Change in Serum Triglycerides

Exhibit 15: PRESS V Study in Diabetic Dyslipidemia % Change in HBA1C

-50%

-40%

-30%

-20%

-10%

0%

Saroglitazar 4 mg Pioglitazone 45 mg

(%)

PRESS V Study in Diabetic Dyslipidemia % Change in Serum Triglycerides

-30%

-40%-50%

-40%

-30%

-20%

-10%

0%

Saroglitazar 4 mg Pioglitazone 45 mg

(%)

PRESS V Study in Diabetic Dyslipidemia % Change in HBA1C

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 16: PRESS V Study in Diabetic Dyslipidemia Mean change in Body Weight (Kg)

-0.5 0 0.5 1 1.5 2

Saroglitazar 4 mg

Pioglitazone 45 mg

(Kg)

PRESS V Study in Diabetic Dyslipidemia Mean change in Body Weight (Kg)




Exhibit 17: Safety Data on Saroglitazar from PRESS VI study

Source: DIABETES TECHNOLOGY & THERAPEUTICS Volume 16, Number 2, 2014

Saroglitazar is differentiated on safety, however, the same needs to be established in long-term studies in a larger population

The clinical evidence (PRESS V and PRESS VI) – Phase 3 studies conducted in Indian populations suggests that Saroglitazar is safe and not associated with the typical safety concerns seen with its peers (other dual PPAR agonists in the past). Saroglitazar has established efficacy in significantly lowering triglycerides and glucose levels in patients with diabetic dyslipidemia and hypertriglyceridemia patients.

Since saroglitazar belongs to a class that is tainted with safety risks, it will need to establish its safety through longer duration and larger trials. Cumulative evidence from preclinical studies and short term (24 weeks) clinical studies suggests there is no evidence of most risks seen with traditional dual PPAR α/γ agonists. We believe the only residual risk that saroglitazar will need to establish itself on would be renal safety. Although saroglitazar is excreted through non-renal route, but faint signals of creatinine increase have been reported in smaller studies for which regulators may expect long-term studies in a larger patient population.

Evidence of Saroglitazar in Non-Alcoholic Steatohepatitis (NASH)

Non-Alcoholic Steatohepatitis is a liver disease caused by a build of fat around the liver. NASH causes histologic liver damage similar to that in alcoholic hepatitis but occurs in patients who are not alcoholics and who often are obese or have type 2 diabetes mellitus or dyslipidemia.

Prevalence of NASH in the US: Estimates suggests there are 30mn patients in the US who suffer from NASH

Approved Treatments: Currently there are no approved treatment for NASH in the US. Dietary caloric restriction and exercise, is the cornerstone of therapy for NAFLD, In absence of any approved treatment, some international bodies recommend using pioglitazone which has limitations in long-term use due to established safety risks.



Sargolitazar is in undergoing Phase 2 studies in the US in NASH patients: Cadila Healthcare is currently conducting a Phase 2 clinical trial evaluating multiple doses of Sargoglitazar in Phase 2 studies in the US. The trial has enrolled 104 patients and should report data from the study in the current financial year.

Evidence on Saroglitazar in NASH: Saroglitazar was evaluated in An interventional study conducted in 20 patients with a confirmed diagnosis of NASH in government medical college and Hospital – Chandigarh. The patient received Saroglitazar for a month and the results found a favourable effect. 19 of the 20 patients demonstrated a 17%-61% reduction in alanine aminotransferase levels. In about 25% of the patients, ALT levels returned to normal levels.

Evidence on Saroglitazar in Mouse Model – Better than Pioglitazone

In a study involving mouse model (diet induced NASH), saroglitazar has demonstrated that it works better than pioglitazone ( off label – standard of care in NASH)

1. Compared to pioglitazone, Saroglitazar significantly reduced steatosis (both percent and grade), NAS score, and SAF activity score.

2. Hepatocyte ballooning was completely eliminated in the Saroglitazar treated group

3. There was significantly less liver fibrosis as measured by NASH CRN score and perisinusoidal fibrosis score in the Saroglitazar-treated group compared to the positive control group

4. No Saroglitazar treated mice progressed past steatosis to NASH whereas most pioglitazone and positive WD/SW controls did progress

5. The body weight of the Saroglitazar treatment group at the end of the study was significantly less than pioglitazone, vehicle control, and positive controls

6. Saroglitazar lowered fasting blood glucose more than pioglitazone and lowered fasting insulin more than all other groups.

7. Saroglitazar treatment successfully attenuated and even reversed some serological and pathological measures of NASH.



Desidustat: HIF-PH Inhibitor for Treatment of Anaemia in Non-Dialysis Dependent Chronic Kidney Disease Patients

Desidustat (ZYAN1) is being evaluated in the treatment of anaemia associated with chronic kidney disease in Phase 3 trials in Indian population. Desidustat belongs to a class of drugs called - prolyl hydroxylase domain (PHD) inhibitors. This is a novel class with about five major drugs in an advanced stage of development. The global competitive scenario is as under

Desidustat MoA is validated through very convincing late-stage trial data on competing drugs in Pipeline

AstraZeneca’s Roxadustat is the most advanced drug candidate in development in the US and EU. Phase 3 studies which enrolled ~2,800 patients on roxadustat have been completed. Clinical data from the trial demonstrates Roxadustat is able to deliver clinically meaningful and statistically significant improvement in Haemoglobin levels in CKD patients (not on dialysis). The trial success bodes well for Desidustat and other compounds with the same MoA under development. Cardiovascular safety which is a safety concern with the existing standard of care (erythropoietin) was also ruled out in Phase 3 studies on Roxadustat.

Vadadustat which reported Phase-3 data recently demonstrated non-inferiority in improving haemoglobin to darbapoietin in non-dialysis dependent CKD patients.

Exhibit 18: Characteristics of HIF-PH Inhibitors under Development

Generic Name Investigational Name

Sponsor Half-Life, h Dosing Frequency

Investigational Status

Roxadustat FG-4592 FibroGen, Astellas, & AstraZeneca

12-13 3×/wk Phase 3 Completed Approved in China

Vadadustat AKB-6548 Akebia 4.5 Daily Phase 3 ongoing

Daprodustat GSK-1278863 GlaxoSmithKline 4 Daily Phase 3 (US) Filing (Japan)

Molidustat BAY 85-3934 Bayer NA Daily Phase 3


Desidustat is currently being developed for Indian Markets – Global trials have not been initiated yet

Cadila recently advanced desidustat in Phase 3 trials in India; however, it is yet to initiate global trials that would allow it to file the product in developed markets. The Phase 3 trials will enrol 588 patients (Non-dialysis CKD patients with anaemia) across 50 to 60 sites and will measure improvement in Haemoglobin levels with Desidustat versus Darbepoetin.

Value proposition of Desidustat:

Erythropoietin is the current standard of care in Anaemia associated with chronic kidney disease. However, administration of Erythropoietin is inconvenient (being injectable) and over time there are safety concerns related to an increased risk of cardiovascular events.

Desidustat may be a preferred agent since it acts by increasing the natural production of erythropoietin in the body and being oral it is easier to administer and hence improves compliance. It is believed that HIF-PH agents like desidustat induce lower but more consistent blood erythropoietin levels than ESAs, and hence may be associated with fewer adverse cardiovascular effects at comparable hemoglobin levels, although this has yet to be proved in long-term clinical trials.



Clinical Evidence on Desidustat

In the early stage pharmacokinetic study, oral single (10–300 mg) and multiple dosing (100–300 mg) of ZYAN1 in healthy subjects was found to be safe and well-tolerated. With increasing ZYAN1 dose, there was almost a proportional increase in mean C max and AUC t. The mean serum EPO concentrations showed a trend of dose response. Based on the t ½, pharmacodynamic activity, and lack of drug accumulation, a once every 2 days dosing regimen of ZYAN1 was appropriate for phase II study.

In Phase II, a total of 117 subjects were assigned randomly in a ratio of 1:1:1:1 treatment groups: 29 to the each of ZYAN1 group (i.e., 100 mg, 150 mg, and 200 mg) and 30 to the placebo group, of which103 subjects completed the study.

Evidence on efficacy

Improvement in Haemoglobin Levels accompanied by improved Erythropoietin (EPO) levels

Significant increase was observed in Haemoglobin (Hb) levels from Week 2 to Week 6 in ZYAN1 100 mg, 150 mg and 200 mg treatment groups vs. placebo. This trend was observed in both mITT and PP populations. Greater than 80% responders were observed in ZYAN1 200 mg and >60% responders have observed in ZYAN1 100 mg and 150 mg treatment groups.

The significant increase was observed in Total Iron Binding Capacity (TIBC) levels from Week 2 to Week 6 in ZYAN1 150mg and 200 mg treatment groups vs. placebo in mITT and PP populations. The significant increase was observed in TIBC levels at Week 6 in ZYAN1 100 mg treatment group vs. placebo. The significant decrease was observed in Transferrin saturation at Week 6 in ZYAN1 150 and 200 mg treatment groups vs. placebo at p <0.025 in both mITT and PP populations.

The significant increase was observed in EPO levels in ZYAN1 150 and 200 mg treatment groups compared to placebo from 6 hrs post-dose to 10 hrs post dose at Week 0 and Week 6 visits. Iron, TG and CRP were stable during the study with no significant change in both mITT and PP populations. The significant decrease was observed in hepcidin levels at Week 2 in ZYAN1 150 and 200 mg treatment groups compared to placebo and at Week 6, the change from baseline in hepcidin levels was statistically significant in ZYAN1 treatment groups in mITT and PP populations.

Evidence on Safety: A total of 31 AEs were reported from 18 (15.38%) subjects during the study. In total, the most commonly reported TEAEs (PTs) during the study were abdominal pain, vomiting and headache. These TEAEs were observed in total approximately 4% of subjects. No serious adverse events and deaths were reported in ZYAN1 treatment group and no persistent change in laboratory parameters. No clinically relevant treatment differences were observed in ECG findings between treatment groups after 6 weeks of treatment.

Market opportunity for Desidustat:

Globally anaemia associated with chronic kidney disease represents a US$5bn market, of which US$1bn is the current market size representing the target indication (Non-Dialysis dependent chronic kidney disease patients with anaemia) for which Desidustat is being developed. Existing market opportunity size is relatively smaller for non dialysis segment as the treatment rate is low. Lower treatment rates may be attributed to the injectable route of administration of existing treatment agents (Erythropoietin) and an unfavourable risk-reward for erythropoietin agents due to the CV risk associated with their use. There are 1.7mn non-dialysis dependent CKD associated anaemia patients, of which only 16% patients are treated with Erythropoietin while the rest are managed through OTC iron. Among those managed with OTC iron, only 20% attain desired Haemoglobin levels. OTC iron being an oral treatment is preferred by patients owing to convenience which is affordable.

Desidustat being oral and as effective as erythropoietin can become the preferred treatment agent if approved in such patients.



Source: Akebia Therapeutics








Valuation

We value Cadila Healthcare at 20x FY21E EPS and arrive at a target price of Rs315. The key assumptions in our forecasts being the US business will exhibit a flattish trend as new approvals will be at best offset the erosion in existing large assets. Domestic and Wellness business should grow low-mid teens and high single-digit respectively. The rest of the business which includes API, Joint Ventures and LATAM markets will grow high single-digit.

Exhibit 19: Historical price/earnings ratio of Cadila Healthcare

0

5

10

15

20

25

30

35M

ay/1

3

Sep

/13

Jan/

14

May

/14

Sep

/14

Jan/

15

May

/15

Sep

/15

Jan/

16

May

/16

Sep

/16

Jan/

17

May

/17

Sep

/17

Jan/

18

May

/18

Sep

/18

Jan/

19

May

/19

(x)

PE Mean 1SD -1SD

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Risks to our recommendation

1) Regulatory compliance remains the key risk. In our base case, we assume the regulatory situation at Moraiya getting escalated to an OAI status. However, in case of an import alert, we witness about a 40% hit in our base earnings forecasts. Likewise, if Moraiya is resolved successfully, we can see an uptick of about 20% in earnings forecast.

2) Exchange rate – Depreciation / Appreciation of USD versus INR can have an adverse/favorable impact on earnings versus our forecasts. For an adverse/ favorable change in the exchange rate of USD versus INR by Re1, we estimate the impact on earnings to be about Rs500 mn.



Ratio charts Exhibit 20: Revenue and Revenue Growth Exhibit 21: EBITDA margin

30

18

25

17

20

16

-5

25

10

11

6

(10)

(5)

0

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35

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

FY

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FY

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FY

20E

FY

21E

(%)(Rsmn)

Total Revenues Revenue Growth

19 1918

15 15

1921

18

2220

17 17

0

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FY

19

FY

20

E

FY

21

E

(%)

EBITDA margins Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 22: Current ratio and cash ratio

2.0

1.8 1.9

2.3

1.82.0 2.0

2.1

2.4

2.1

2.3 2.2

1.2 1.1 1.1

1.4

1.11.3 1.4

1.51.7

1.41.6 1.6

0.0

0.5

1.0

1.5

2.0

2.5

FY

10

FY

11

FY

12

FY

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FY

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FY

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FY

18

FY

19

FY

20

E

FY

21

E

(x)

Current ratio Quick ratio


Exhibit 23: Debt-to-equity ratio

67.0

47.1

78.1

91.1

65.954.9

39.4

72.0

59.1

68.860.7

50.4

0

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20

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40

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70

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90

100

FY

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FY

19

FY

20

E

FY

21

E

(%)

Debt to Equity Ratio Source: Company, Nirmal Bang Institutional Equities Research



Exhibit 24: Cash conversion cycle

8895

143 140

121

109

9095

117

148

162167

60

80

100

120

140

160

180

FY

10

FY

11

FY

12

FY

13

FY

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FY

15

FY

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FY

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FY

18

FY

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FY

20

E

FY

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E

(Days)

Cash Conversion Cycle


Exhibit 25: Return on Assets

18

21

13

11

14

17

20

12 12

108 8

0

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20

25

FY

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17

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FY

19

FY

20

E

FY

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E

(%)

RoA


Exhibit 26: Return on Equity

33 34

2623

2528 29

21 2018

13 13

0

5

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35

40

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E

FY

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E

(%)

RoE




Exhibit 27: Return on Capital Employed

35

40

29

2125

31

39

18

22

1716 16

0

5

10

15

20

25

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35

40

45

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E

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E

(%)

RoCE




Cadila Healthcare - Overview

Cadila Healthcare Ltd. is one of the leading pharmaceutical companies in India with presence across the pharmaceutical value chain of research, development, manufacturing, marketing and selling of finished dosage human formulations (generics, branded generics and specialty formulations, including biosimilars and vaccines), active pharmaceutical ingredients (‘APIs’), animal healthcare products and consumer wellness products. The company has a global presence and sells its products in the United States, India, Europe and emerging markets including countries in Latin America, Asia Pacific region and Africa. The company has a pool of modern, cost-efficient and regulatory compliant manufacturing facilities which ensures a continuous supply of high-quality products at the most competitive prices to its customers across the globe. The Company is also engaged in research and development activities focused across the value chain of API process development, generics development for simple as well as differentiated dosage forms like modified release oral solids, transdermals, topicals and nasals, biologics, vaccines, and New Chemical Entities (‘NCE’).

Exhibit 28: Shareholding Pattern

Particulars No. of shares (mn) % held

Promoter & promoter group 765.7 74.8

Mutual funds 54.4 5.3

Franklin Templeton 16.0 1.6

Foreign portfolio investors 83.1 8.1

Government Pension Fund Global 11.52 1.1

Financial institutions/banks 38.4 3.8

LIC 28.8 2.8

Others 82.1 8.0

Source: BSE, Nirmal Bang Institutional Equities Research

Exhibit 29: Revenue Breakup

50%

29%

7%

4%

4%3%

2% 1%

USA India Asia, Africa, LATAM Wellness Animal Health API Europe JVs




Financials

Exhibit 30: Income statement


Net sales 95,723 119,364 131,656 145,820 154,191

% growth -4.5 24.7 10.3 10.8 5.7

Raw material costs 34,189 41,220 47,164 52,465 56,261

Staff costs 15,198 18,545 21,241 23,711 25,371

R&D expenses 5,980 6,828 6,828 7,791 8,251

Other expenditure 21,312 24,296 26,692 33,288 34,952

Total expenditure 76,679 90,889 101,925 117,255 124,835

EBITDA 19,044 28,475 29,731 28,565 29,356

% growth (26.0) 49.5 4.4 (3.9) 2.8

EBITDA margin (%) 19.9 23.9 22.6 19.6 19.0

Other income 1,284 1,132 2,011 2,273 2,622

Interest costs 446 911 1,935 3,497 3,204

Gross profit 61,534 78,144 84,492 93,355 97,930

% growth (8.9) 27.0 8.1 10.5 4.9

Depreciation 3,733 5,388 5,986 6,814 7,264

Profit before tax 16,152 23,308 23,821 20,527 21,509

% growth (24.0) 44.3 2.2 (13.8) 4.8

Tax 1,289 5,644 5,303 5,039 5,275

Effective tax rate (%) 8 24 22 25 25

PAT before Minority Interest 14,863 17,664 18,518 15,488 16,235

Share of JV 311 440 469 469 469

Minority Interest (291) 94 (499) (526) (583) 19 PAT after Minority Interest 14,883 18,198 18,488 15,431 16,120

% growth (4.6) 18.8 4.8 (16.4) 4.8

EPS (Rs) 14.5 17.3 18.1 15.1 15.7


Exhibit 32: Balance sheet


Equity 1,024 1,024 1,024 1,024 1,024

Reserves 68,576 86,421 102,839 114,178 126,206

Net worth 69,600 87,445 103,863 115,202 127,230

Minority Interest 1,561 1,910 12,929 12,929 12,929

Net deferred tax liabilities 1,280 3,341 3,060 3,060 3,060

Total Loans 50,081 51,650 71,466 69,936 64,083

Other Long Term Liabilities 1,512 1,682 2,594 2,594 2,594

Liabilities 124,034 146,028 193,912 203,721 209,896

Net Block 32,904 38,157 51,059 56,059 61,059

CWIP 15,433 15,272 8,372 0 0

Intangible Assets and Goodwill

24,647 26,669 70,578 68,541 68,541

Other Non Current Assets 12,512 12,020 13,166 13,166 13,166

Non-Current Investments 6,488 6,238 6,675 6,675 6,675

Inventories 18,037 23,853 26,880 30,430 32,631

Debtors 22,775 32,063 39,508 45,327 48,006

Cash 15,435 13,149 6,493 17,479 16,708

Other current assets 3,976 13,232 12,100 12,100 12,100

Total current assets 60,223 82,297 84,981 105,336 109,445

Creditors 15,479 18,884 19,226 22,035 23,629

Other current liabilities 12,694 15,741 21,693 24,021 25,360

Total current liabilities 28,173 34,625 40,919 46,056 48,990

Net current assets 32,050 47,672 44,062 59,280 60,455

Total Assets 124,034 146,028 193,912 203,721 209,896


Exhibit 31: Cash flow


EBIT 16,903 24,659 26,225 24,493 25,182

(Inc.)/dec. in working capital (1,154) (17,908) (3,046) (4,232) (1,947)

Cash flow from operations 15,749 6,751 23,179 20,260 23,236

Other income (1,284) (1,132) (2,011) (2,273) (2,622)

Other Expenses 977 2,501 188 469 469

Depriciation 3,733 5,388 5,986 6,814 7,264

Tax paid (-) (1,289) (5,644) (5,303) (5,039) (5,275)

Net cash from operations 17,886 7,864 22,039 20,232 23,072

Capital expenditure (-) (28,821) (12,502) (55,897) (1,405) (12,264)

Net cash after capex (10,935) (4,638) (33,858) 18,827 10,808

Other Investing activities (9,825) 1,874 428 2,273 2,622

Cash from Financial Activities 29,242 478 26,774 (10,113) (14,201)

Opening cash 6,953 15,435 13,149 6,493 17,479

Closing cash 15,435 13,149 6,493 17,479 16,708

Change in cash 8,482 (2,286) (6,656) 10,986 (771)


Exhibit 33: Key ratios

Y/E March FY17 FY18 FY19 FY20E FY21E

Profitability & return ratios

EBITDA margin (%) 19.9 23.9 22.6 19.6 19.0

EBIT margin (%) 17.3 20.3 19.6 16.5 16.0

Net profit margin (%) 15.5 14.8 14.1 10.6 10.5

RoE (%) 21.4 20.2 17.8 13.4 12.8

RoCE (%) 17.6 22.1 17.1 15.5 15.7

Working capital & liquidity ratios

Receivables (days) 75 84 99 106 110

Inventory (days) 174 185 196 199 205

Payables (days) 154 152 147 144 148

Current ratio (x) 2.1 2.4 2.1 2.3 2.2

Quick ratio (x) 1.5 1.7 1.4 1.6 1.6

Valuation ratios

EV/sales (x) 8.2 6.6 2.5 2.2 2.0

EV/EBITDA (x) 41.3 27.7 11.2 11.2 10.8

P/E (x) 50.5 42.3 14.5 17.4 16.6

P/BV (x) 10.8 8.6 2.6 2.3 2.1




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Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

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