Buy Cadila Healthcare; target of Rs 415: Karvy

Karvy Stock Broking report on Cadila Healthcare:


The domestic formulations business should clock double-digit growth compared to single digit growth clocked by the company in current year. The acquisition of Liva Healthcare would enable the company to add 15 % incremental growth in the already existing Rs 370 mn business. We have incorporated the same and raised our revenue estimates for the FY 2008E by 2 % and earnings by 5.3 % to Rs 22.8.

Cadila Healthcare (Cadila), a company with dominant revenues in the domestic formulations space (65%) of revenues is all set to change with the formulations exports being the fulcrum of growth which currently constitutes 13% of revenues will move to 19.5% of revenues by FY 2008. The key growth segments would be US, France and ROW (35 emerging markets worldwide) and Custom manufacturing.


US business gaining traction:


The US business has done well and is expected to be on target with revenue scale up from USD 11 mn in FY 2006 to USD 42 mn in FY2008. Tie-up with Mallinkrodt will be a winwin deal as Mallinkrodt has not got presence in non -narcotic based segments and Cadila will have an opportunity to scale up in the US generics market. Cadila will have a a product basket of 12-15 products and revenues of USD 30 mn for FY 2007E. In FY 2008E, the company is expecting further 15 approvals and a product basket of 25-28 products on shelf and revenues of USD 42 mn in FY 2008.


ROW, French business and to pan out:


The company's French business is expected to move up from Euro 10 mn in FY2006 to Euro 30 mn in FY 2008E. Aggressive ramp up in product basket and volumes will enable scale up in this business. Emerging markets would be another revenue driver on the back of scale up in Brazil and ROW business segments. This business segment is expected to grow by more than 53 % to Rs1.3 billion in FY2008.


Reasonable Valuations Make it an Outperformer:


We have upgraded our revenue numbers for the domestic formulations with the acquisition of the Liva Healthcare. With revenue traction in major revenue segments coupled with margin expansion on back of better gross margins in some of the markets and cost savings initiative, we believe the company is on a sustained growth path. We raised our revenue estimates for the FY 2008E by 2 % and earnings by 5.3 % to Rs 22.8 on back of acquisition of Liva Healthcare. We upgrade our price target by 5 % to Rs 415 on back of 18.2x FY 2008 (EPS Rs 22.8)