We upgrade Cadila Healthcare (Cadila) to BUY from Add considering attractive valuations (14.1xFY21E) after recent correction in the stock price. We believe over 20% fall has completely factored-in the bear case scenario (warning letter) for Moraiya facility and an expected decline in FY20 earnings. We estimate 10.9% drop in FY20E EPS due to expectation of zero approvals from Moraiya, remedial expenses and revenue decline from large products (generic Lialda and AndroGel) with higher competition. The company expects strong launch momentum in the US (>35 in FY20) to continue, which would help sustain the high base of US sales (I-sec: 4% decline), while India business growth is likely to be in-line with the industry. Upgrade to BUY.
We believe the recent correction in the stock price largely factors-in the expectation of a negative outcome on Moraiya facility, decline in FY20 EPS and subdued near-term outlook for the US business. Rising proportion of India business (pharma + wellness) would provide cushion to margins and valuations in our view. Our earnings estimates for FY20-21 are 13.5%/ 11.8% lower than Bloomberg consensus estimates and valuations look reasonable.
We expect revenue and EBITDA CAGRs of 8.6% and 6.1%, respectively, over FY19-21E on high base of FY19 and zero approvals from Moraiya. We expect EPS to remain flat over FY19-21E on a high base and affected by Heinz acquisition with higher interest cost. We cut revenue/EPS estimates by 0-1/2-3%. On attractive valuations, we upgrade the stock to BUY from Add with a revised target price of Rs 282/share based on 17xFY21E EPS (earlier: Rs 292/share). Key downside risks: Delay in the launch of high-value products in the US and regulatory hurdles.