Cadila Healthcare (CDH) is adversely impacted by high investments and lack of approvals for its key products. This revenue cost mismatch led to margin compression and consensus earnings estimate cuts by 20-25% for FY14/15 over the past 12 months.
This is also reflected in the stock’s underperformance in the same period. We remain positive on the prospects of the US pipeline over the medium term. The company has made some high-quality filings in US in transdermals and other formulations.
On a relatively low base, the impact of a few of these approvals could be significant over the next three years, in our view. Our interaction with management suggests that CDH is likely to be more conservative on expansion and the focus will be on execution.
We restate our 12-month target price based on 18x (unchanged) one year forward EPS of R48.5 to R874 (from R871), with an upside potential of 20% from current levels. Hence, we upgrade to Buy.
On our revised estimates, the stock is currently trading at 17.4x FY15F EPS of R42.1 and 14.3x FY16F EPS of R51.8. We believe the stock’s underperformance over the past 12 months (the stock was down 14% vs Sensex’s and BSETHC’s return of +8% and 19%, respectively) and consensus earnings estimate cuts do factor in the risk of a potential delay in approvals.
Thus, we do not find the valuations demanding.