Home / Markets / Mark To Market /  Cadila Healthcare’s earnings, covid-19 portfolio drive stock

Cadila Healthcare Ltd’s Q2 results were well ahead of expectations, with revenues growing 13% year-on-year (y-o-y). Its stock gained about 6% on the better-than-expected Q2 performance. Investors are also betting on covid-19 drugs and the US business gaining traction in the coming quarters.

Cadila’s divisions have all perked up nicely with US growing at about 18% y-o-y. The India business growth of 11% is good given that the acute segment is not firing that well. Increased demand for active pharma ingredients (API) also pushed revenues in this division higher.

Investors are banking on increased contribution from the covid-19 portfolio in the coming quarters. Besides, backward integration in API manufacturing is aiding margins in the covid portfolio.

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Recovering well

“Cadila has launched the most affordable Remdesivir in the Indian market, and is likely to have taken a leading share. Cadila makes its own API. Affordable pricing and backward integration make it sustainable even when incremental competition gets introduced in future. Cadila plans to take Remdesivir to other emerging markets. The company has two vaccine candidates and the leading one is in phase 2 trial with a best-case launch date of March 2021 in India," said analysts at Jefferies India in a note.

Cadila’s US business growth has been steady. The firm launched six products in the US with approvals in place for 10 products, so that should support some revenue expansion in the US. Operating profit expanded by about 400 basis points y-o-y due to lower costs and better operating leverage. Ebitda margins stood at 22.6% in Q2. Ebitda is earnings before interest, tax, depreciation and amortization.

But given that the stock is already up about 72% in 2020, a good chunk of the expected growth rate is factored in the price. Further, a large portion of its operating profit is coming from a few product segments that can be a deterrent if these segments slow.

“We estimate Mesalamine franchise (gLialda, gAsacol HD) and Tamiflu together account for about 15% of total revenue and 40-45% of Ebitda," said Emkay Global Financial Services Ltd in a client note.

Hence, Cadila’s valuations, which have shot up to about 24 times FY22 earnings as per Reuters data, may have limited room to expand.

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