Even as the BSE Healthcare Index clocked a 19 per cent gain, the stock of Cadila Healthcare lost 21 per cent this year, weighed down by challenges in the US market and in the joint venture with Hospira.
As a result, Cadila’s price-earnings multiple has tumbled from its historical average of 18-20 times forward earnings to 14-16 times. With growth prospects in the US improving and signs of stability in the Hospira venture, the stock looks attractive at 15 times its FY15 earnings. Investors with a one to two-year perspective can accumulate the stock.
Clarity over the new drug approval timelines by the US Food and Drug Administration will help Cadila sustain growth momentum in this market which accounts for over a fourth of its revenues. With some 100 products awaiting approval in the US, Cadila expects to launch 20 products over the next 12-15 months. This will help the company maintain growth momentum in this market. Also, the shift in focus towards niche products with low competition will help Cadila improve margins.
The Zydus-Hospira venture’s profits that slumped due to pricing pressure in a key product — an API (active pharmaceutical ingredient) for a large anti-cancer injectable — are expected to improve sequentially. With the full impact of price cut felt in the September quarter, margins are likely to improve from here. Further, the joint venture is expected to commence supplies of select new products, which will shore up profits.
Growth challenges in India due to pricing policy changes and the recent strike by the trade, which impacted Cadila’s numbers, are also expected to be sorted out soon. The negative impact on revenues on account of the new drug policy may not exceed Rs 70 crore.
The ongoing strike by drug wholesalers and retailers demanding higher margins is expected to be sorted out by this quarter-end. Improvement in domestic sales by the second half of the fiscal will deliver a lift to Cadila’s profits, given the healthy margins in the home market.
Zydus Wellness, its consumer products subsidiary, plans initiatives to improve marketing and distribution of its brands — Everyuth and Nutralite — in addition to launching new variants. The company aims at sustaining double digit growth over the next few quarters.
Cadila’s consolidated revenues grew 12.9 per cent to Rs 1,747 crore during the September quarter. This was largely driven by higher exports to the US, Europe and Brazil. Adjusted for foreign exchange losses, operating profit margins slipped almost 4 percentage points to 14.9 per cent. However, lower tax outgo due to tax credit helped the company almost double its profits to Rs 183 crore, compared with the year-ago period. Accelerated growth in India and the US can drive margin recovery over the next few quarters.