Stock Market Result Update on Cadila Healthcare for 2QFY2012

Stock Market Result Update on Cadila Healthcare for 2QFY2012 with a Buy recommendation and a Target Price of `965 (12 months).

Cadila Healthcare (Cadila) reported a disappointing set of numbers for 2QFY2012, except on the sales front; sales were mostly in-line at ~`1,220cr. However, higher expenses during the quarter resulted in a contraction in the operating margin, which came in at 18.1%. This coupled with forex losses during the quarter resulted in higher dip in net profit during the quarter. We recommend a Buy rating on the stock.

Disappointing set of numbers: For 2QFY2012, Cadila reported in-line net sales of `1,220cr, up 10.3% yoy, driven by the exports segment. On the domestic front, net sales grew by 6.6% yoy to `470cr. Although the company’s gross margin came in flat at 68.0%, OPM declined to 18.1% during the quarter, majorly due to higher employee expenses and R&D expenses, which grew by 32.1% and 23.0% yoy, respectively. Net profit for the quarter declined by 39.8% yoy to `103cr, lower than our estimate. Adjusted for forex losses, the company posted a ~3% decline in its net profit during the quarter.

Outlook and valuation: We expect Cadila’s net sales to post a 19.2% CAGR to `6,343cr and EPS to report a 19.4% CAGR to `48.2 over FY2011–13E. We recommend Buy on the stock with the revised target price of `965.