Zydus Cadila Poised to Benefit from Solid Growth Drivers, Debt Could Be A Concern

Summary

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• Zydus is a dominant player across value chain of healthcare business in India and has an extensive presence across four continents
• Zydus is in a good position to gain from growth drivers across key product lines and geographies
• New products and volumes are major growth drivers

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Cadila Healthcare (NSE:CADILAHC) or Zydus Cadila is a leading pharmaceutical company. It is a fully integrated, global healthcare provider. The company possesses in-depth domain expertise in the field of healthcare and has strong capabilities across the spectrum of the pharmaceutical value chain. Zydus is the fourth largest pharma company in India and seventh largest pharmaceutical company in the US by total prescription. The company has over 15 years of presence in the US market. It is headquartered in Ahmedabad, Gujrat. Cadila Healthcare has 35 manufacturing plants worldwide in India, Brazil and the USA. The origin of the company dates back to the 1950s. In 1995, the group was restructured and Cadila Healthcare was formed under the aegis of the Zydus group.

Zydus Cadila Positives

i) Large presence in Indian and international markets - Zydus Cadila has state of the art manufacturing capabilities. It has a strong distribution network with a significant presence at retailer chemists’ accounts. The group has manufacturing sites and research facilities across five Indian states of Gujarat, Maharashtra, Goa, Himachal Pradesh, and Sikkim and also in the U.S. and Brazil. Zydus has a strong presence in the regulated markets of the U.S., Europe and also in the high profile markets of Latin America and South Africa. It also has a large footprint in 25 other emerging markets worldwide. About 65% of the company’s revenues are derived from emerging global markets which are strong potential growth markets. Zydus is one of the fastest growing pharmaceutical companies in the US with ~ $900 million in revenues. 

ii) Extensive research and innovative technologies - The company has extensive R&D facilities and engages in the innovation of differentiated medicines for the future. It spent $135 million on R&D in the last year. It is exploring varied areas ranging from NCEs to vaccines, biosimilars, and niche technologies. These innovations are targeted towards meeting the unmet healthcare needs of the masses. Zydus’ innovation program is spearheaded by 1300 researchers across 19 sites. The company has manufacturing capabilities across the entire pharmaceutical value chain including formulations, APIs, vaccines, biosimilars, complex products, animal health, and wellness products.

iii) Wide range of products - Zydus is known for providing comprehensive and complete healthcare solutions. With more than 26 years of operational excellence, the company has developed strong capabilities across the entire spectrum of the pharmaceutical value chain ranging from formulations to active pharmaceutical ingredients and animal healthcare products to wellness products. Zydus’ brands are widely trusted and have a strong brand recall value. A few of its leading wellness brands include Sugar Free, Nutralite, everyuth, etc. Zydus ranks No.1 in sugar substitutes, butter substitutes, and skincare products. It is the second largest animal healthcare company in India and has consolidated its presence through the acquisition of Zoetis.

iv) Solid history of Revenue Growth - Zydus’ sales can be split into US formulations (49% of 2019 revenues), Indian formulations (28%), EMB formulations (7%), wellness (6%), animal health (4%), API (3%), European formulations (2%) and alliances (1%). The company has come a long way and registered a turnover of over Rs.12,700 crores in FY19 from just Rs. 250 crores in 1995, and registered a growth of 20% CAGR in revenues over the last two decades. Zydus has proven commercial success in the US market with revenues growing at CAGR of ~20%. Its Indian business comprises the India formulations business and the Biologics business which drives the sales and marketing of biosimilars and novel biologics.

Zydus Negatives

Zydus Cadila’s primary concern is its rising level of borrowings. As of September 2019, Cadila Healthcare had a huge debt load of Rs.7,082 crores, up from Rs.5,407 crores in one year and only Rs. 713 crores in cash and cash equivalent. Though its interest coverage ratio is 6.5, indicating that Cadila Healthcare has enough margin of safety for paying interest on its debt, the company’s latest debt to EBITDA ratio (TTM) is roughly 2.73 rising from 2.55 as of March 2019. An increasing debt/EBITDA ratio means that the company is increasing debt more than its earnings. Also, Cadila Healthcare’s free cash flow amounted to 42% of its EBIT. That could be alarming when it comes to paying down debt.

Valuation

Shares of Cadila Healthcare are currently trading near the Rs. 270 mark. The company has decent investment fundamentals with ROE and ROCE at 18% and 15% respectively. The stock is currently trading at 19x its earnings which is cheaper than industry PE of 32x. Cadila Healthcare’s market capitalization value is more than Rs. 27,400 crores. The company has registered a total shareholder return of 19% CAGR and earnings growth of 18% CAGR over the last 15 years.

Future Growth Drivers

Zydus’ large presence in key geographic markets of the US and India and leading product lines of wellness, biosimilars, vaccines, NCEs & NBEs act as major growth drivers. The company is undertaking various measures for building scale in 2-3 markets and global platforms in differentiated assets. It is diversifying its business through building specialty portfolios and biologics and has a rich product pipeline across biologicals, vaccines, differentiated Gx, etc. Zydus is also exploring growth opportunities through mergers and acquisitions. Zydus is all set for growth through its investments in generics portfolio, specialty generics, and brand business and expects the next wave of growth will come from branded businesses.

Conclusion

Zydus is well-positioned for growth with a strong portfolio of products ranging from vanilla generics to NCES. Over the years, the company has mastered supply-chain excellence, cost-competitive manufacturing, and successful partnerships to drive growth. Growing pharma and animal healthcare business act as strong tailwinds for the company.

 

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