Low Valuations May Work in Favour of Cadila Health

The recent run-up in the stock of Cadila Healthcare is likely to be sustained due to indications of imminent improvement in the company’s performance. The Ahmedabadbased drugs manufacturer reported a revenue growth of 12% in the quarter to September that was largely driven by its performance in the United States and Brazil. Its revenues from the domestic market, which accounts for nearly 40% of its consolidated sales, grew just 5% during the three-month period because of the standoff between the distributors and manufacturers over implementation of the new drug pricing policy. This also adversely impacted its operating margin, which, at a little over 15%, remained almost the same as the year-ago level.

Cadila has 20 abbreviated new drug application (ANDA) approvals lined up in the US over the next 12-15 months. It is set to launch products in niche segments that will boost its top line growth as well as margins. The company commands a 4.5% share in the domestic market, where it has a strong presence in therapeutic areas of cardiovascular, gastrointestinal, respiratory and female healthcare. The company’s domestic business is also likely to improve as a result of general recovery in the Indian healthcare sector.
The company’s consumer goods business, housed under Zydus Wellness, which has been underperforming over the past few quarters, is expected to grow at a faster pace as it has pumped considerable funds into brands such as Sugarfree and Everyuth. According to the management’s guidance, this business will post a double-digit growth.

Cadila’s weak performance in the past few quarters had led to the stock’s underperformance on the bourses. Consequently, the stock is trading at a price-to-earnings multiple of 20 – much lower than ET Pharma Index’s PE of 31.5. It is valued at a market cap, which is just 2.3 times of its revenues of trailing four quarters. Most leading pharma companies are trading at a valuation of three to fives times their revenues. The low valuation makes Cadila an attractive pick in the defensive sector where most stocks are trading at stretched valuations. Little wonder then that there has been 50% increase in the ‘buy’ recommendations by analysts on the company’s stock in the past three months, along with a slight increase in the foreign institutional investors’ holding in the past two quarters.