Maintain ‘hold’ on Cadila Healthcare with TP at Rs 425

A strong pick-up in India sales helped 2Q; sustainability of India & US sales growth and debt reduction will be key ahead. Trials ongoing for Covid-19 vaccine and other Covid treatments, though financial benefits not clear at present Maintain Hold; raise TP to Rs 425 (from Rs 405). Key catalyst – regulatory approval for Covid-19 vaccine in India.

Strong pick-up in India sales helped 2Q. Cadila reported revenues of Rs 38.3bn in 2Q (+14% yoy,+5.7% qoq) with growth primarily driven by a strong pick-up in India formulation sales which, at Rs 10.9bn, grew 31.1% qoq (+11.2% yoy) on volume expansion amid the gradual unlocking of the market from Covid-19-led restrictions. US sales at INR17.1bn grew 18% yoy and 5.3% qoq and business remains as usual with no notable impact from Covid-19. With a pick-up in India sales, Cadila saw normalizing operating costs from the lows of 1Q, however, it is yet to see full resumption of marketing costs. Thus, it continues to see benefits of lower operating costs on its EBITDA margin which, at 22.8%, improved 65bps qoq. Reported PAT at INR4.7bn grew 4.3% qoq. In 2Q, Cadila reduced its net debt by 40% from the Mar 2020 level, on favourable working capital (where it may see a reversal in 2H) and proceeds from the Zydus Wellness QIP. India and US sales should sustain growth. After a strong pick-up in 2Q, Cadila hopes to sustain momentum in India formulation sales on volume growth in key specialty segments and new launches. While its US sales are cyclical (2H sees seasonal sales of anti-virals, mainly gTamiflu), Cadila expects US base generic sales to sustain growth on new launches and volume gains in existing products. Generic injectables and other differentiated drugs (incl. in-licensed products) will be key drivers for US sales. It aims for sales of $150-200m from generic injectables by FY24 (FY20 sales of ~$15m).

Efforts ongoing on Covid-19 products and long-term drivers. Cadila is currently conducting phase 2 clinical trials for an investigational plasmid DNA-based Covid vaccine (ZyCoV-D) in India and expects a data readout by end Nov 2020. It plans to immediately proceed to phase III studies and expects results to be available by Mar-April 2021. It believe its DNA vaccine platform is highly scalable which allows it to rapidly ramp-up production if demand arises.