On the road to recovery

We initiate coverage on Cadila with an ADD rating premised on: 1) Recovery in India business post the restructuring measures; we forecast 8% CAGR over FY20-23e; 2) While product concentration risk remains high in the US, timely approval of complex opportunities will be key to offset erosion and drive growth; and 3) R&D investments in vaccines, biosimilars, NCE/NBEs, Covid portfolio adds potential upside opportunities which is currently not factored in our estimates. Moraiya resolution and further debt reduction will be the key catalysts to monitor in the near to medium term. Our target price of Rs445/sh is based on 20x Sep 22 EPS.

* India formulations business is restructured, growth trajectory to improve : India business performance is expected to pick up driven by improvement in field force productivity, new launches (including first to market), ramp up in biosimilars (~6% of revenues) and Covid portfolio.

* Product concentration risk remains high in US, pipeline execution will be key: US revenues (~USD900mn) have stabilized over the last two years with 2 limited competition assets - Asacol HD and gLialda (Mesalamine franchise) contributing ~30% to revenues. While the near term risk to the franchise is limited (Asacol HD - patent expires in Nov 21, gLialda – competitors are struggling to scale up given product complexity), timely approvals of complex opportunities (transdermals, topicals, injectables) will be key to offset base business erosion.

* Investments in vaccines, biosimilars, NCE offers longer term growth visibility: Cadila spends ~35-40% of its R&D on development of vaccines (15+), biosimilars (~21), NCE/NBE (10+) for global markets. In India, ~11 biosimilars and 4 vaccines are currently marketed with revenues of Rs3.4bn and Rs500mn, respectively (as per AIOCD). While the global addressable market opportunity remains large (Exhibit 21, 22), we have not factored any upsides from these programs.

* Q2 FY21 highlights: Q2FY21 revenues grew by 13% YoY to Rs38bn driven by robust growth across markets. EBITDA margins were strong at 22.6% (+400bps YoY and 20bps QoQ, cost control) and grew by 38% YoY. Net debt reduced to Rs40bn from Rs67bn in Mar 20 aided by fund raise at Zydus wellness (Rs10bn) and healthy FCF generation (WC day improvement).

* Our target price of Rs445/sh provides ~8% upside potential; risks: We initiate coverage on Cadila with an ADD rating and TP of Rs445/sh based on a target PER of 20x Sep 22e EPS, ~15% discount to large cap peers like Cipla, Lupin. Downside risks: higher product concentration risk in the US; delay in Moraiya resolution (WL), higher price erosion, lower growth in India.

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