Cadila Reports Decline In Earnings, Margins Slide Down By 300 bps

Pharma Company Cadila Healthcare has reported a rather subdued result for the third quarter of the current fiscal. The company has reported a 15% growth in its topline to Rs 1561 crore. Its Net profit has declined by 29% to Rs 111.53 crore. The result is very surprising, as Large-Ccap pharma companies have posted a growth of about 30% in revenues and sales. The reaction on the bourses was obvious as the stock crashed by 2.5% to close on 795 by end of the day.

Though the press release is not out as of yet, the result itself is quite clear. Its materials cost increased sharply by 60% on a YoY basis. As per cent of sales, this cost is at 25.5% of sales, compared to 18.41% a year before. This is a jump of about 700 basis points, which is huge enough to decrease its EBITDA margins by 300 basis points. Its other expenditure increased by 24% and in terms of per cent of sales, it increased by 262 basis points. The employee costs, as per cent of cost, has declined marginally.

On the tax front, the company has seen its taxes going up by 263%. Last year, in the corresponding quarter, the company had seen a tax rate of 10% which has increased to 36% in the December 2012 quarter. This should be seen as a base impact as the tax rate is in line with what the company paid in the September quarter of the current fiscal.

On the valuation front, the stock is trading at a Price to Earnings of 29x to its TTM EPS of Rs 27.5. This is very expensive compared to its peers. The stock has underperformed the pharma index in the last one year. We expect some further correction in the stock and hence, buying fresh shares should be avoided. Those who have bought the shares should keep holding them.