Zydus Lifesciences Ltd. share price target

Domestic formulations and US generics showing improved traction.

Cadila Healthcare Limited (Cadila) reported weak results for Q2FY2020. Revenue at Rs. 3,367 crore grew by 14% y-o-y but marginally missed our estimates. Operating profit at Rs. 626 crore fell by 9% y-o-y and was below our estimates. During the quarter, the company reported an exceptional loss of Rs. 268 crore on account of impairment towards Levorphanol. Adjusted PAT stood at Rs. 351 crore, down 15% y-o-y and was below our estimate of Rs. 365 crore. Following a warning letter from the US FDA, Cadila discontinued...

Q2FY20 revenues grew 13.7% YoY to | 3366.6 crore (I-direct estimate: | 3579.8 crore) mainly due to consolidation of the craft portfolio in the wellness segment. US revenues grew 9.7% YoY to | 1448.4 crore (I-direct estimate: | 1432.1 crore). Domestic formulations grew 9.5% YoY to | 977.8 crore (I-direct estimate: | 955.7 crore). EBITDA margins contracted 464 bps to 18.6% (I-direct estimate: 21.9%), mainly on account of higher other expenditure. EBITDA de-grew 9.0% YoY to | 625.6 crore (I-direct estimate: | 784.0 crore). Adjusted PAT (excluding net impairment charges of | 209.9...

13 November 2019 2QFY20 sales at INR33.6b (in-line) were up 13.7% YoY, largely led by the Consumer Wellness business (sales at INR3.2b YoY v/s INR1.4b last year). API business also supported growth to some extent (+17.9% YoY to INR1b). India formulations grew 10.4% YoY to INR9.8b (30% of sales) for the quarter. US sales at INR14.5b (45% of sales) were up 9.7% YoY. EM sales grew 7.6% YoY to INR2.

Cadila Healthcare Limited (Cadila) reported 22.2% y-o-y growth in total operating revenue to Rs. 3,496.3 crore (2% above estimate). Operating profit (adjusted for one-time cost of Rs. 70 related to acquisition) reported 14.8% y-o-y growth to Rs. 702 crore (6.5% above estimate); OPM declined by 130 BPS y-o-y to 20.1% (100 BPS above our estimate of 19.1%). Adjusted profit grew by 14.5% to Rs. 384.8 crore (11.9 % above estimates). Strong sales growth was mainly due to consumer wellness business in India (acquisition led). India human formulation reported 6%...

Cadilas revenues increased by 20.8 percent on a YoY basis to Rs 34.9 bn (our estimate of Rs 37.6 bn) during the quarter.

The US (48% of revenues) has grown at a CAGR of ~17% in FY15-19 backed by aggressive filings and product launches. Launches of authorised generics also contributed to overall growth. The US pipeline (cumulative) consists of 330 filed ANDAs, 144 pending final approvals. But resurfacing of cGMP issues at Moraiya (WL resolved in February 2017) and an eminent slowdown in the base are main near term headwinds. We expect US sales growth to remain muted in FY19-21E mainly due to high base and absence of meaningful launches in the near term. India to witness restructuring; focus on profitable SKUs...

We upgraded CDH recently as we believe that the impact of OAI on its key formulations facility at Moraiya, Gujrat is already priced-in. The sharp ~30% FYTD fall in the price makes it one of the cheapest among the large-cap pharma stocks at 15.7x onFY21E EPS. With ~100 pending approvals and 2/3rd of them being filed from Ex-Moraiya units, we believe US$ 800mn US revenues and Rs 14.6 EPS (ex-Asacol HD) are achievable. With the ability to generate Rs 8-10bn FCFs annually, net debt position remains comfortable at ~Rs 70bn (0.7x FY19). We maintain BUY on CDH despite a miss on our estimates due to certain one-time costs. We have cut our FY21 EPS by 6% to accommodate higher interest cost. Our TP is revised to Rs 265 (18x FY21E EPS).

We downgraded CDH recently after the key formulations facility at Moraiya, Gujarat, received several critical observations related to contamination post USFDA's inspection. Since this facility contributes 40-45% to US revenues (in our estimates) and has ~30% of the pending US filings, we believe a warning letter (WL) or import alert would be detrimental for CDH (~40% downside). The US remains CDH's key performer as India and other segments have been disappointing consistently. Any slowdown in the US could severely hurt earnings, especially since gLialda, gTamiflu and gAsacol HD contribute 29% to US revenues (in FY19). In case of any adversities, the elevated debt (0.7x FY19E Net D/E) could prove to be fatal for earnings. We maintain NEU on CDH following a miss on our estimates. We have downsized our estimates to adjust for a weaker outlook on profitability over FY20-21E. Revised TP of Rs 285 (18x FY21E EPS) provides a limited upside.

The US (48% of revenues) has grown at a CAGR of ~17% in FY15-18 backed by aggressive filings and product launches. Launches of authorised generics also contributed to overall growth. The US pipeline (cumulative) consists of 330 filed ANDAs, 144 pending final approvals. The USFDA cleared Moraiya in February 2017. The new Ahmedabad SEZ and Baddi facilities have also started getting approvals. We expect US sales to grow just 3% to | 6643...