Buy Cadila Health, target of Rs 1,763: Nomura

Reiterate buy on Cadila Healthcare with a revised target price of Rs 1,763 from Rs 1,218 earlier.

Reiterate buy on Cadila Healthcare with a revised target price of R1,763 from R 1,218 earlier. We value Cadila’s earnings ex-Asacol HD at 19x (from 18x earlier) FY17f EPS of R85.2 per share to arrive at our base business value of R1,619 per share. We value Asacol HD at R144 per share (8x FY17f of R17.9 per share). The stock is trading at 19.2x FY16f (EPS R84.12) and 15.7x FY17f (EPS R103.16). With clarity on product approvals, the stock can trade at 20x FY17f in the next 12 months.

We had recently highlighted that price hike in anti-malaria drug hydroxychloroquine sulphate presents a very strong near-term earnings support for the company though we expect the benefit to wane over time. We now factor in R6.7, R9.1 and R4 per share from the product in FY15, FY16f and FY17f, respectively. Cadila would have a pipeline of ~170-180 ANDAs pending approval by end FY15f, with pending-to-approved ANDA ratio of 1.9x, the highest among peers. Its large number of filings, along with known high-value ANDAs like Prevacid ODT, Asacol HD, Lialda, Venofer points at the possibility of strong consensus earnings upgrades.

We expect domestic formulation business growth to revive from H2FY15f. Our EPS estimates for FY15f, FY16f and FY17f are revised up by 24%, 17% and 9% respectively. The recent approval miss (Sirolimus) and product recalls are negatives. Clarity on approvals will be a key positive catalyst.

By Nomura

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