Valuation - Assignment II

Company Name: Zydus (Cadila Healthcare Ltd)

Team Members: B Lohith Kumar || Shinjan Bhattacharya || Praneet Kapooria || Saket Gupta

Q1-What has been my company’s core strategy for growth in Revenue in the past couple of years or so? Is it increase in sales
volume, selling price, or combined? Did the company gain (loose) from buoyancy (dip) in the economy, customer preferences,
etc.?
  The core strategy of Cadila Healthcare is to expand their product portfolio through strategic collaboration, In-licensing or
acquisition and to have diversified portfolio of innovative, differentiated vaccines catering to unmet needs. There are not
much big changes in the prices of products as the prices of medicines or vaccines are regulated government policies.
 In the United States market, company launched highest number of new products during the single financial year FY 18-19,
with 43 new product launches. The company also received 74 ANDA approvals from the U.S Food and Drug
Administration during the year. In the Indian market, company launched 53 new products, including line extensions, of
which 8 were first-in-India launches.
 According Cadila Healthcare, Innovation is the growth engine for future. The Company invested approximately 7 to 8% of
its annual revenues on innovation in FY18-19 and FY 19-20.
 Agility is another characteristic which is perfectly suits the Cadila healthcare. In the current pandemic of COVID-19, the
Company quickly initiated a fast-tracked research programme with multiple teams in India and Europe for developing a
vaccine for the novel coronavirus COVID-19. Zydus’ vaccine for COVID-19 (ZyCoV-D) successfully completes preclinical
development and in the month of July, the company also started human dosing.
 Being one of the largest manufacturers of Hydroxychloroquine, the company ramped up the production from 3 metric
tonnes to 20 metric tonnes and subsequently scalable to 30 metric tonnes and ensured supplies to the Government in
India and also to the other countries as mandated. Even when the economy was dipping and there was country wide
lockdown, the company uninterruptedly supplied medicines and HCQs to the rest of the world

Q2- How has been the operating performance in terms of: (a) revenue growth, (b) operating profit margin, (c) net profit
margin, (d) asset utilization? Did any strategic initiative help?

 Over the past 3 years, the company has seen a steady rise in its revenue. The company’s reported revenue in the year
ending March-2018 were Rs 6017.80 Cr. In the following year, the company reported a growth in revenue of 9.6%. In the
year ending March-2020 the company’s reported revenue had increased by 19.5% as compared to 2018.
 In the year ending March 2020, the company’s operating margin fell by 4.75% as compared to last year. Upon conducting a
common size analysis, it was observed that while the COGS of the company fell by 1%, there was an increase in the
financing cost and other expenses of the company by 1.89% and 2.35% respectively. There was also an increase of 1.52%
in the cost associated with changes in inventory of FG, WIP and Stock in Trade.
 The net profit margin of the company for the year ending March 2020 fell by 2.89% as compared to last year. Even though
there was an increase in the reported revenue, the fall in the net profit margin can be explained by the falling operating
profit margin.
 The asset utilization of the company can be understood by examining the Asset Turnover Ratio, which fell by 5.82% for
the year ending March 2020, as compared to the previous year. This can be explained by the acquisition of Heinz India
Wellness, which significantly increased the assets of the company.

As mentioned above the core strategy of Cadila Healthcare is expansion of product portfolio and it has done by so by
researching and creating new drugs as well as acquiring Heinz India. This has resulted an increase in the revenue for the
firm and once the pandemic is over, the full effect of the acquisition will be seen for the company.

Q3 – Did my company invest in new fixed asset? In what ways: expansion, acquisition?
The consolidated gross block (including capital work in progress) at the year ending March 2020 was Rs 175.2 billion, up by about
Rs 9.8 billion. Over the past 3 years there has been a steady increase in the assets of the company. The most significant increase
was seen in the year 2018-19, when the company acquired Heinz India Pvt. Ltd., which increased the assets of the company Rs
56.6 billion. Other than that the company also invested in creating new facilities and upgradation and capacity expansion of
existing facilities which resulted in an increase of Rs 12.2 billion in the fixed asset of the company.

Q4- How did it fund the investments in assets? New Debt, New Equity, Internal Equity?

 In the year January 2019, Cadila acquired Heinz India Wellness Which includes products like Complan, Glucon-D and
Nycil etc. In this acquisition, it also includes two large manufacturing facilities along with logistics, research, distribution,
marketing and support teams, and a network of over 800 distributors and 20,000 wholesalers spanning 29 states.
 The purchase funding has been through a combination of debt and equity. Rs. 2,575 crores were raised by issuing 18.6
million shares on a preferential basis to Cadila Healthcare (Rs 1,175 crore), Zydus Family Trust (Rs 300 crore), True North
(Rs 1,000 crore) and Pioneer Investment Fund (Rs 100 crore) at an issue price of Rs 1,382 per share, resulting in an equity
dilution of nearly 48%.
 Another Rs 1,500 crore was raised by the company by issuing 9.14% Non-Convertible Debentures on a private placement
basis. The principal payment was made through Rs 550 crore cash available with the company.

Q5. Going forward what kind of growth is company expecting? What strategies will help them?

 Zydus Cadila is expecting growth in key geographic markets including US & India businesses driven by the increase in
purchasing power and access to quality healthcare and pharmaceuticals to poor and middle-class families
 The company is expecting the growth to fuelled by company’s key product lines including Wellness, Biosimilar, Vaccine
business

US Business:

 Zydus is one of the fastest growing pharmaceutical companies in the US with US$895 Mn revenues growing at CAGR of
18%
 The US Medicine Spending was 466 Bn$+ in 2017 & is expected to reach 600 Bn$ by 2022 with a CAGR of 4-7% driven
by Novel Treatment Options, Launch of high-value products, Biologics and Specialty Medicines
 Zydus is well positioned for growth with a strong portfolio of products ranging from Vanilla Generics to NCES through in-
house efforts as well as partnerships
 Zydus has already built a diligent product portfolio of 500 products with 175+ new launches
 Zydus wants to strengthen its focus on base business and wants to diversify its portfolio for favourable risk reward ratio
 As the generic market competition is also increasing, Zydus wants to increase its investments in launching new products

India Business:

 Indian Pharmaceutical market is expected to grow to US$ 100 billion by 2025 and Zydus is well positioned to dominate the
market across the value chain of Healthcare Business in India
 Zydus is currently is 4th largest pharma player by market size and caters to various markets with its diverse product
portfolio ranging from formulation business to consumer wellness & animal health
 India Pharma Business:

 India’s pharma market is expected to grow double digit despite challenges and the Zydus expects the volumes and new
products will lead the growth for the market
 Zydus wants to dominate the market by strengthening its existing core portfolio and launch new products in niche
categories including Biosimilar & Vaccine market
 The company is also focusing its efforts to build 25 mega brands in niche categories by leveraging digital infrastructure

India Zydus Wellness Business:

 Zydus Wellness Limited (ZWL), the Company’s subsidiary, spearheads the group’s operations in the consumer wellness
space, which has a portfolio of leading brands, built organically over the years as well as acquired through inorganic route
 FMCG market is shaping up and growing at rapid pace owing to rapidly changing consumer preferences and income
upscaling & rapidly growing middle class and Consumer wellness industry is well poised to benefit as consumer spending
in health & wellness products has increased.
 Zydus wants to adopt a two-fold strategy to grow the product categories and increase the market shares of its brands
o Zydus wants to create more reach and depth in distributing its products across India and wants to use the trade
channel effectively to push and build its portfolio
o Zydus wants to create specialised products to serve growing needs in niche categories in wellness market
 Zydus has successfully completed end to end integration of newly acquired Heinz India business and wants to re-brand
products Complan, Nycil & Glucon-D in order to increase the relevance and salience

India Animal Health Business:

 Zydus is India’s second largest Animal healthcare company in India

 Indian Animal Healthcare market is witnessing healthy growth led by poultry & Biological portfolio
 Zydus is eyeing opportunities in animal healthcare market as new variations of animal diseases pose both challenges
 The company wants to Fast scale up its farm-care business to improve the market share in nutrition-centric livestock
market
 Zydus is also investing in R&D to enable faster development of superior new products to maintain leadership position in
therapeutic and poultry businesses

Biosimilar Market:

 Zydus is expecting a huge growth in biosimilar market in key geographic markets including US, India & Emerging market
 Zydus has already invested heavily in this biosimilar market and is ready to launch new products to cater the demand
 Zydus wants to be No. 1 Player in Biosimilars space and wants to remain a strong player based on continuous cost
improvements
 In emerging markets, Zydus is planning to partner With Regional Leaders in Various Markets
 In EU&US market, Zydus wants to focus its business with a Limited Portfolio based on the competition scenario Sand
willing to seek partnerships on product to product basis

Vaccine Market:
  Global Vaccines Market is expected to reach $65 Bn by 2023 at CAGR of 10.9% during 2017-231 and the growth drivers
will be rise in awareness of preventive measures, strong government programs in middle- and low-income countries
 Zydus is eyeing a huge opportunity in vaccine market mainly in India geography
 Zydus in already ramping up its efforts to focus on innovative and differentiated vaccines catering to unmet needs

Q6 – What will help the company accelerate/deaccelerate earnings i.e in improving the profit margin or will decline?

Digitization:

 In today’s changing business environment, digital transformation is imperative for any business to fundamentally
change how the business operates and deliver more value to its customers
 Digital transformation will have a profound impact on businesses, accelerating business activities and
processes to fully leverage the opportunities in a strategic way
 Zydus needs to take various initiatives in the digital space to build the operational efficiencies and in turn, drive
the performance of various businesses
 One way could be to develop and integrate Enterprise System to digitize end to end supply chain processes
that include system generated sales forecasting with market consensus, manufacturing plan generation and
simulation, inventory planning, production scheduling & prioritization, optimal utilization of manufacturing
capacity & other resources so that the company can have better visibility across the value chain