Cadila Net Down 8%

Cadila Healthcare, the sixth-largest pharma company in India by market capitalisation, announced its December quarter results on February 7, 2012. The company reported a 19 per cent rise in its total income to Rs 1,383 crore and a 7.69 per cent decline in its net profit to Rs 169.60 crore.

As a result of the higher raw material expenses as well as a rise in the contribution of traded goods, its EBITDA margins declined by 198 basis points on a consolidated basis. The depreciation and employee cost remained in line with the corresponding quarter in the last fiscal. Its research and development (R&D) expenses remained at Rs 112 crore for the quarter due to the new product filing activities. The R&D expenses are actually quite high and half of what the company spent in FY11 alone (Rs 250 crore).

Its current total debt of Rs 2,250 crore has more than doubled from its debt in the corresponding quarter last fiscal. As an impact of this its interest payment has tripled from Rs 19 crore to Rs 59 crore on a YoY basis in the December quarter of this fiscal. Its current debt to equity ratio is 0.7 and the company wishes to cap it below 1.0 going ahead. It has set a capex of Rs 400-500 crore for the next fiscal year but has not indicated its funding options at this moment.

During this quarter Cadila acquired a 100 per cent stake in another pharma company called Biochem. Biochem has annual sales of Rs 260 crore and about 1,200 employees. The December quarter result includes Rs 10 crore (2 weeks sales) in the topline and the full quarter impact of this acquisition will be seen in the March quarter. The company has not disclosed its margins as well as the acquisition amount. Biochem is an active player in the acute therapy segment in which Cadila is targeting to gain an increasing market share. The company hopes to reap the benefits of this acquisition by using its existing distribution network and unlocking the synergy between the two companies.

From the conference call it became apparent that the company is currently facing stiff competition in the consumer products of its wellness segment. As a result, the company has become a little subdued in its advertising campaigns as well as the marketing of its flagship products like Nutralite, Sugar Free, etc. But now it wants to change its stance and the commercials will be back on track. Going ahead, the company expects growth in this segment. In FY11 this segment fetched Rs 335 crore in revenues and the company aims to pull it to Rs 500 crore in the next two years.

Besides this, the company has a licensing deal for 24 products with Abbot Laboratories which will start adding revenues from the next fiscal. The revenue details of this deal are not available at the moment. It is also expecting to launch a few of its products in the US market. However, we believe that this process may get delayed as one of its manufacturing facilities in Gujarat was recently issued a warning by the USFDA.

The company wishes to become a USD 3 billion company by 2015. Looking at its FY11 revenues we believe that this is a very stiff target. It has been on an acquisition spree and wishes to continue with this momentum even in the foreign pharma market if it comes across good opportunities. At the moment other companies like Lupin, Dr Reddy’s Laboratories, etc are providing better investment opportunities as compared to Cadila Healthcare. In our opinion investors should wait till the time the company announces a clear road map for its projected USD 3 billion revenue target.