We remain 'neutral' on Cadila Healthcare shares with a 12-month target price of Rs 871 per share. On our current estimates, the stock is trading at 18.6x FY14f and 16x FY15f EPS, a 0-25% discount to other generic companies, which we believe is justified given near-term earnings risk.
Cadilaís Q4 was ahead of our estimates by 10% at the operating level and was largely drive by higher royalty income in the quarter. Gross margins remain under pressure due to a price drop in the US market and higher contribution from authorised generic sales.
Ebitda margin at 18.6% in FY13 dropped 301 bps y-o-y and is the lowest in many years. US approvals remain the most important factor driving margins. There is limited visibility on interesting US launches in FY14. Therefore, most of the margin expansion is expected in FY15. Management guidance of a 15% effective tax rate (versus 25-30% earlier) to an extent negates the risk of slippage in the US.
For the quarter, EM and Europe recorded 86% and 36% growth y-o-y, respectively. The growth in Europe was driven by France and Spain. EM growth was driven by countries in APac and Africa, as per the company. US revenues declined 1% q-o-q due to lack of meaningful launches. For FY13, Cadila launched only seven new products. Japan revenues in Indian rupee terms were under pressure due to Japanese Yen depreciation, with sales growth at 3.7% y-o-y. India formulation growth at 14.4% was largely in line with our expectations.
In our view, implementation of the new price control regime in India presents a headwind.