Cadila Healthcare looks to be an attractive long-term bet

Cadila Pharmaceuticals Limited

Beta 0.3

Institutional holding 17.5%

Dividend Yield 1.2%

P/E 14.9

M-Cap Rs 4,578cr

CMP Rs 359.7

One of the top ten pharma companies (by sales) in the country, Cadila Healthcare’s stock went up by 56% in the last four months, outperforming the ET Pharma Index that rose by 43% during the period. At twice its revenues, the company looks fairly valued for its size and business. However, considering Cadila’s growth potential, it looks to be an attractive long-term bet. Nevertheless, any short-term rally in the stock does not look sustainable, as the market seems to have discounted most of the current good news.

Business:

Ahmedabad-based Cadila Healthcare is the flagship company of the Zydus Cadila group. It is engaged in manufacturing of formulations, active pharmaceutical ingredie-nts and consumer products. A lit-tle over half of its revenues are contri-buted by its operations in India, 30% from regulated mark-ets like US, EU and Japan and the rest from emerging markets. In the domestic market, it manufactures drugs related to cardiology, gastro-intestinal, women’s healthcare and respiratory illnesses. It is also involved in contract manufacturing space thro-ugh joint ventures with Switzerlandbased Nyco-med and USbased Hospira.

Growth Strategy:

Cadila’s growth comes primarily from its exports. In FY09, the company acquired Spainish generic player Laboratories Combix, and followed it up by acquiring South Africabased Simalya Pharmaceuticals. The company is now actively strengthening its regulatory drug pipeline to enter new territories. The company has filed a total of 92 ANDAs and 76 DMFs. Cadila invests 6% of its revenues in R&D.

The company which plans to be a research driven pharmaceutical firm is currently working on 6 New Molecular Entities (NME). The company expects to have at least 10 active R&D programs in clinical research by 2011. It has entered into a new drug discovery and development agreement with Eli Lilly in the area of cardiovascular segment. The company may receive milestone payments of up to US$ 300 million and royalties on sales if a molecule is commercialized by Eli Lilly. Cadila has also integrated its restructured con-sumer business into its subsidiary Zydus Wellness.

Financials:

The Rs 2800 crore company logged a better than expected performance in FY09. And it has set itself an ambitious target of doubling its revenues to $1 billion (Rs 5000 crore) by FY2011. To achieve its target, the company is betting on the ramp up of its operations in its joint venture contract manufacturing business and export formulations. The company’s earnings would be further boosted as its joint venture with Hospira has started commercial operations from May this year.Amajor concern, however, is the slow rate of growth registered by its domestic business, the highest contributor to its revenues currently. During FY09, its Indian business operations grew only by 10%, lagging behind the average industry growth of 12%.

Valuations:

Given the multipronged business and the significant scale up in its operations, the company’s stock, unlike its peers, had been under valued till recently. With most large pharma companies having taken a beating due to poor performance or clamp-down by US FDA, the market turned to stocks having untap-ped value. Cadila Healthcare was one such stock with a lot of value intact. However, with most of the value having been realised , the stock looks fairly valued in the near term. For long term investors, it is good buy, while the investors with very short term horizons can probably give it a miss.