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Post its IPO in 2000, Zydus Cadila or Cadila Healthcare has catapulted itself into the top rung pharma companies in the Indian market through a series of mergers and acquisitions. After acquiring German Remedies, the company now stands at fourth position in the domestic market with a broad therapeutic portfolio including faster growing categories like gynaecology, respiratory and oncology. Its strategic alliance with Kopran which includes acquiring the Rs 400 mn brand- Aten will strengthen its presence in the important cardiovascular segment. These acquisitions will help the company recover from its earlier sluggish performance.

At the current market price of Rs 131, the stock is trading at 9.6x FY02E EPS (half year results annualised), which is at a discount to its peers. These results do not take into account German Remedies and Aten and thus, on a consolidated basis, valuations are even better. The company is not yet in the league of Dr. Reddys and Ranbaxy, and there are concerns (which we have outlined below), but the current valuations are attractive especially considering the size and marketing strengths of the company.

For the latest quarter ending September, sales growth was a low 5%. Operating margins improved marginally at 17.7%, a push came from lower tax charges which resulted in a profit growth of 15%. For the six months ended 30 Spetember, performance is much better with a PBT growth of 17% and a net profit growth of 22%.

Sales growth has been stymied by the slow domestic market and heavy reliance on mature categories. Also, the company’s exports at 14% of sales are lower than other industry stalwarts. However, going forward, growth rates will be boosted by German Remedies products and Aten. The other major concern is the price paid for acquisitions which could dampen ROCE in the long run. The company also does not have any achievements to show in R&D which will prevent a significant rerating of the stock.

We believe these concerns are priced in at the current level and the stock offers a good bargain with low risk to earnings and possibility of a grow.

Gold Digger

Contact at : godi@indiainfoline.com

5Paisa Team

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