We upgrade Cadila Healthcare Ltdto ‘buy’ (earlier ‘underperform’) and raise the target price to R1,000 (earlier R705), thus valuing the company at 18x FY16e EPS. We cut our FY14e EPS by 6% and raise FY15 and FY16e EPS by 3% and 7%, respectively.
We believe that with increased assets utilization and improvement in margins, return rations and balance sheet ratios are set to improve. Over the past three years, it has invested nearly 30-35% of its capex on assets such as biologics, transdermal, vaccine and discovery research, which have not yielded any results, resulting in return ratios coming under pressure.
In our view, the worst is behind for Cadila and earnings will accelerate from FY15. We expect the company’s sales to post 18% CAGR over FY14-16, led by 25% growth in the US and 14.7% growth in domestic formulation. In the near term, earnings will remain under pressure. However, we expect 30% PAT CAGR over FY14-16, driven by pick-up in US approvals cycle, recovery in domestic business in FY15 and a 250 bps margin expansion. Cadila is readying itself for the next leg of growth by investing in technology and pipeline and has one of the strongest pipeline depth among peers.