3QFY2013 Result Update | Pharmaceutical

February 8, 2013

Cadila Healthcare
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Adj. net profit 3QFY2013 2QFY2013 1,561 60 1023 212 103 1513 42 941 271 149 % chg (qoq) 3.2 44.5 8.7 (21.9) (30.9) 3QFY2012 1352 49 290 231 149 % chg (yoy) 15.4 22.7 252.5 (8.2) (31.0)

NEUTRAL
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 16,202 1,944 0.3 964 / 661 14,349 5 19,485 5,904 CADI.BO CDH@IN

791 -

Source: Company, Angel Research

Cadila Healthcare (Cadila) reported below-expected numbers for 3QFY2013, except on the sales front. The companys sales for the quarter at `1,561cr, were just-in-line with our estimates. On the operating front, the gross and operating margins came in below our expectations. This along with a higher tax expense during the quarter resulted in the net profit coming in a tad lower than expectations. Overall, the adjusted net profit came in at `103cr, a dip of 31.0% yoy. The Management expects the company to be a US$3bn one, by FY2016. We recommend a Neutral rating on the stock. Below expectation results: For 3QFY2013, Cadila reported net sales of `1,561cr, up 15.4% yoy, just-in-line with our estimate of `1,559cr. Sales were driven by a 21.8% yoy growth in the domestic markets, while exports grew only by 12.9% yoy during the period. During the quarter, the companys gross margin dipped to 65.5%, a contraction of 104bp. This led to the OPM to contract to 13.6% (17.1% in 3QFY2012), ie by 349bp yoy. This along with the higher tax expense during the quarter, led the adjusted net profit to decline by 31.0% yoy to `103cr (`149cr in 3QFY2012), below our estimate of `182cr. Outlook and valuation: We expect Cadilas net sales to post a 17.3% CAGR to `7,386cr and EPS to report an 11.5% CAGR to `39.5 over FY201214. We recommend a Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 74.8 15.2 5.1 4.9

Abs.(%) Sensex Cadila

3m 3.4 (4.6)

1yr 10.0 19.2

3yr 22.3 68.9

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

FY2011 4,465 24.9 711 39.6 34.7 19.3 22.8 37.4 22.9 7.5 3.8 19.6

FY2012 5,090 14.0 650 (8.6) 31.7 17.9 24.9 27.4 17.3 6.3 3.5 19.6

FY2013E 6,148 20.8 539 (17.1) 26.3 16.0 30.0 19.6 13.7 5.5 3.0 18.6

FY2014E 7,386 20.1 808 49.9 39.5 18.0 20.0 24.8 17.2 4.5 2.4 13.6

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Cadila Healthcare | 3QFY2013 Result Update

Exhibit 1: 3QFY2013 performance (Consolidated)

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

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

2QFY2013 1,513 42 1,554 941 62.2 271 17.9 41 43 229 71 158 53 9 95 4.6

% chg (qoq) 3.2 44.5 4.3 8.7 (21.9) 18.2 14.8 (23.8) (11.7) (29.3) (2.4) 8.1

3QFY2012 1,352 49 1,401 900 66.6 231 17.1 59 47 174 17 157 0 7 149 7.3

% chg (yoy) 15.4 22.7 15.7 13.6 (8.2) (19.3) 6.6 0.3 263.1 (28.8)

9MFY2013 4,590 190 4,779 2967 64.7 686 15.0 146 136 594 178 416 0 24

9MFY2012 3,746 155 3,901 2541 67.8 681 18.2 147 119 570 69 501 0 19 482 23.5

% chg 22.5 22.1 22.5 16.8 0.7 (1.2) 14.7 4.1 156.1 (16.9)

(31.0)

393 19.2

(18.4)

Exhibit 2: 3QFY2013 Actual vs Angel estimates

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

Actual

Estimates

Variance

1,561 60 212 49 103

1,559 28 279 50 182

0.1 116.2 (24.0) (1.2) (43.4)

Revenue up 15.4% yoy, just-in-line with estimates

For 3QFY2013, Cadila reported net sales of `1,561cr, up 15.4% yoy and higher than our estimate of `1,559cr, driven by domestic markets, which grew by 25.3% yoy. Organic growth during the quarter in domestic formulations has been around 18% yoy. Exports on the other hand grew by 12.9% yoy during the period. The growth in exports came on the back of formulation exports, which grew by 13.5% yoy during the period, impacted by slow growth in the US region, which grew by 14.1% yoy growth. Europe and Japan, the other key geographies, posted a yoy growth of 25.9% and 17.0%, respectively. Brazil and other Emerging markets grew by (15.9%) yoy and 31.8% yoy respectively.

February 8, 2013

Cadila Healthcare | 3QFY2013 Result Update

Exhibit 3: Sales trend in the US and Europe

440 400 360 320 280 344 353 359 367 392

(` cr)

240 200 160 120 80 40 0 3QFY2012 4QFY2012 US 1QFY2013 Europe 2QFY2013 3QFY2013 89 71 85 76 112

Source: Company, Angel Research

For 3QFY2013, the domestic segment reported a 21.8% yoy growth, with the formulations segment registering a 21.4% yoy growth. In the consumer healthcare division, Cadila continued to post a growth of 27.8% in 2QFY2013. Animal healthcare, on the other hand, grew by 21.4% yoy. During the quarter, Cadila launched 15 new products, including line extensions in domestic markets, of which 4 were for the first time in India.

Exhibit 4: Sales trend in domestic formulation and consumer divisions

700 600 500 469 499 582 602 570

(` cr)

400 300 200 100 0 3QFY2012 4QFY2012 1QFY2013 2QFY2013 3QFY2013 Domestic Formulation Consumer division 80 86 103 97 102

Source: Company, Angel Research

On the CRAMS front, the company generated sales of `126cr (`121cr in 3QFY2012), reporting a growth of 4.2% yoy. For FY2013, the company guided for a double digit growth in the CRAMS segment.

February 8, 2013

Cadila Healthcare | 3QFY2013 Result Update

OPM dips by 349bp yoy The companys gross margin dipped to 62.2%, a contraction of 574bp. This led the OPM to contract to 13.6% (17.1% in 3QFY2012), ie a decline of 349bp. During the quarter, R&D expenditure was ~8.8% of net sales vs 8.2% of net sales during 3QFY2012.

Exhibit 5: OPM trend

20 18 16 14 12 17.1 17.0 16.9 17.9 13.6

(%)

10 8 6 4 2 0 3QFY2012 4QFY2012 1QFY2013 2QFY2013 3QFY2013

Source: Company, Angel Research

Adj. net profit declined by 31.0% yoy: The adjusted net profit declined by 31.0% yoy to `103cr (`149cr), lower than our estimate of `182cr.This was on account of a higher tax expense during the quarter. Tax expenses during the quarter were at `63cr (`17cr in 3QFY2012). Reported net profit came in at `103cr vs `149cr in 3QFY2012.

Exhibit 6: Adjusted Net profit trend

250 200 150 100 50 0 3QFY2012 4QFY2012 1QFY2013 2QFY2013 3QFY2013
Source: Company, Angel Research

195 171 149 149 103

February 8, 2013

(` cr)

Cadila Healthcare | 3QFY2013 Result Update

Concall takeaways
The Management maintained its vision of the company being a US$3bn company by FY2016. The key growth drivers for the same would be the US and Indian markets. The Management guided for an 18% growth in the domestic business in FY2013 on the back of Biochems acquisition and new product launches. The company has filed 18 new ANDAs in 3QFY2013. For FY2014, the company will launch 19 orals and 1 transdermal. The company expects a double-digit growth in its consumer healthcare business in FY2013, with OPM of around 25%. Operating margin is expected to improve to 18-19% in FY2014. The Management has guided for capex of `500cr-650cr for FY2014.

Recommendation rationale
Strong domestic portfolio: Cadila is the fifth largest player in the domestic market, with sales of about `2,454cr in FY2012, contributing 47% to its top-line. The company enjoys a leadership position in the CVS, GI, women healthcare and respiratory segments, with a sales force of 4,500. The company, on an aggressive front, launched more than 40 new products in FY2012, including line extensions, of which 10 were for the first time. During FY2008-12, the company reported an ~13% CAGR in its top-line in the domestic formulation business. Going forward, the company expects the segment to grow at an above-industry average rate of 1518% on the back of new product launches and field force expansion. 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 ~7% of sales, posted a dip in sales during the quarter but is expected to post a double digit growth in FY2013. 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 FY2012 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 a critical scale of US$241mn on the sales front in FY2012, primarily driven by market share gains in the US, as some key competitors had manufacturing constraints due to the USFDA issue. 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 targeting Brazil and the CIS region.

Outlook and valuation

We expect Cadilas net sales to post a 17.3% CAGR to `7,386cr and EPS to report an 11.5% CAGR to `39.5 over FY201214. We recommend a Neutral rating on the stock.

February 8, 2013

Cadila Healthcare | 3QFY2013 Result Update

Exhibit 7: Key Assumptions

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

FY2013E 20.8 14.6 16.0 614

FY2014E 20.1 26.6 18.0 650

Exhibit 8: One-year forward PE band

600 500 400

(`)

300 200 100 -

Source: Company, Angel Research

Company background: Cadila Healthcares operations range from API to formulations, 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, the company aims at achieving sales of over US$3bn by 2015 and be a research-driven pharmaceutical company by 2020.

February 8, 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
Price 10x 15x 20x 25x

Cadila Healthcare | 3QFY2013 Result Update

Exhibit 9: Recommendation Summary

Company Alembic Pharma. Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Buy Neutral Accumulate Neutral Buy Neutral Buy Buy Accumulate Neutral Neutral Neutral CMP (`) 74 184 791 381 1,857 99 2,093 61 482 598 429 2,292 744 Aurobindo Pharma Accumulate Tgt. price (`) 95 208 419 145 78 559 655 Upside % 28.4 13.0 9.9 46.5 27.9 15.9 9.5 7.8 13.1 20.0 17.6 20.0 7.3 25.4 7.8 12.9 19.0 13.3 26.1 25.0 FY2014E PE (x) EV/Sales (x) 0.9 1.3 2.4 3.1 2.8 1.1 5.0 0.9 1.9 2.7 1.5 2.9 5.0 EV/EBITDA (x) 5.0 8.9 13.6 12.6 13.4 5.5 16.0 6.0 9.1 12.4 9.3 17.3 11.7 FY12-14E CAGR in EPS (%) 17.1 69.7 11.5 23.2 2.3 26.6 8.7 24.8 30.6 27.2 50.3 2.7 0.1 FY2014E RoCE (%) 29.4 10.7 17.2 19.1 15.1 8.7 38.9 14.6 25.7 24.9 29.7 12.5 27.6 RoE (%) 30.2 17.8 24.8 17.6 20.8 11.0 29.0 15.6 26.4 25.2 16.1 14.8 19.2

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

February 8, 2013

Cadila Healthcare | 3QFY2013 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) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 FY2010 FY2011 FY2012 2,917 55 2,862 65 2,928 26.0 2,322 957 122 311 933 541 34.7 18.9 112 429 40.9 15.0 121 20 5 394 19.3 24 370 66.6 18.0 303 (0.1) 303 327 23.8 10.6 24.0 24.0 14.0 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 37.3 37.3 55.5 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 (7.0) 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) FY2013E 6,217 69 6,148 144 6,292 19.5 5,163 2,090 386 861 1,826 985 8.2 16.0 240 744 (1.1) 12.1 175 43 6 757 (4.7) 757 189.2 25.0 568 28.6 539 539 (17.1) 8.8 26.3 26.3 (17.1) FY2014E 7,460 75 7,386 144 7,530 19.7 6,059 2,437 464 1,090 2,068 1,326 34.7 18.0 293 1,034 38.8 14.0 175 43 4 1,046 38.2 1,046 209.2 20.0 837 28.6 808 808 49.9 10.9 39.5 39.5 49.9

February 8, 2013

Cadila Healthcare | 3QFY2013 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 1,605 252 297 1,056 692 913 2,657 1,775 251 307 1,217 866 909 10 2,872 1,809 757 1,052 189 478 25 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 3,858 1,415 2,443 248 1,015 24 260 2,872 168 266 2,438 1,186 1,686 5,676 4,508 1,708 2,800 248 1,015 24 314 3,692 426 337 2,929 1,755 1,938 6,339 132 2,657 114 2,872 68 1,167 1,235 23 1,267 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 2,835 2,938 119 2,500 43 76 119 5,676 102 3,468 3,572 148 2,500 43 76 119 6,339 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

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Cadila Healthcare | 3QFY2013 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (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 FY2009 FY2010 FY2011 FY2012 FY2013E 370 112 (137) 20 49 275 (388) (1) 20 (368) 421 (71) (98) 252 159 93 252 602 134 3 16 77 646 (299) (84) 16 (368) (177) 75 (177) (279) (1) 252 251 842 127 (286) 13 106 564 (291) (0) 13 (278) 7 (176) (72) (242) 45 251 295 794 158 (365) 53 113 421 (743) (4) 53 (694) 1,238 (175) (619) 444 171 295 467 757 240 (411) 43 189 354 (614) 43 (571) 208 (175) (114) (82) (299) 467 168 FY2014E 1,046 293 6 43 209 1,093 (650) 43 (607) (175) (53) (228) 258 168 426

February 8, 2013

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Cadila Healthcare | 3QFY2013 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 Int. Coverage (EBIT / Int.) 0.8 1.9 3.6 0.5 1.2 6.8 0.4 0.9 10.5 0.7 2.0 4.1 0.8 2.4 4.3 0.6 1.6 5.9 1.7 67 52 70 74 1.9 67 47 72 65 2.1 62 49 80 55 2.0 66 57 136 64 1.8 57 50 61 76 1.8 61 54 77 73 18.3 26.3 28.5 20.2 30.9 35.6 22.9 34.9 37.4 17.3 27.2 27.4 13.7 19.9 19.6 17.2 23.2 24.8 15.0 82.0 1.3 16.5 9.4 0.8 21.9 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 12.1 75.0 1.2 11.2 5.5 0.8 15.4 14.0 80.0 1.3 14.8 5.6 0.7 21.1 24.0 24.0 20.3 3.0 60.4 37.3 37.3 31.2 5.0 79.7 34.7 34.7 40.9 6.0 106.1 31.7 31.7 39.6 8.0 125.7 26.3 26.3 38.1 8.0 143.5 39.5 39.5 53.8 8.0 174.5 33.0 39.0 13.1 0.4 6.0 31.8 6.5 21.2 25.3 9.9 0.6 4.8 24.5 5.9 22.8 19.3 7.5 0.8 3.8 19.6 4.8 24.9 20.0 6.3 1.0 3.5 19.6 3.4 30.0 20.8 5.5 1.0 3.0 18.6 3.2 20.0 14.7 4.5 1.0 2.4 13.6 2.8 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

February 8, 2013

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Cadila Healthcare | 3QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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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%)

February 8, 2013

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