CDHs recent stock price performance was mainly led by a turnaround in margins due to the launch of Depakote ER, successful litigation outcome on Prevacid ODT as well as expectations on transdermal launches in US. Moreover, in the past 24 months, CDH has transformed into a story that is highly leveraged on US launches as most other divisions have continued to disappoint, leading to a skewed growth profile.
However, we foresee most of the near-term catalysts built into the stock price, thus leaving little room for further re-rating potential. We expect FY15 to see continued delays in US launches, which are critical for margin expansion.
At c.20x FY16E EPS, the stock is trading in line with front-line generics.
The CDH management has been guiding for a margin expansion of c300 bps and potential revenues of cR10,000 crore by FY16. While we are only moderately below (-5%) company guidance on the top line, we are sceptical about the margin expansion story given our concerns on Asacol HD and Prevacid ODT launches where the market dynamics are continually changing.