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Reliance Securities
Cadila Healthcare (Buy)
CMP: ₹239.7
Target: ₹300
The US FDA has issued a warning letter (WL) to Cadila Healthcare’s (CDH) Moraiya (Gujarat) OSD and sterile injectable facility, based on the Corrective & Preventive Action (CAPA) submitted by CDH to the observations made by the regulator. The inspection was conducted between April 22 and May 3, following which the US FDA issued 14 observations relating to cleaning validation, OOS and product contamination. As per the company, there were no repeat observations or Data Integrity related observations. Subsequently, the US FDA accorded Moraiya facility as OAI (Official Action Indicated) status in August 2019.
Issue of WL is on expected lines, as the facility has already been accorded with OAI status (observations related to cleaning validation/OOS). While we already factored in the impact of WL into our valuation model in 1QFY20, we expect CDH to deliver muted growth in the US owing to pending regulatory issues, going forward. At CMP, the stock trades at 14.5x and 12.0x of FY20E and FY21E earnings (1-year fwd 3-year historical avg PE @21.8x), which offers attractive risk-reward for the stock. The stock has already been corrected by 24 per cent since the issue of Form-483 for Moraiya.
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