Cadila Healthcare

At A P/E Multiple Of 23, Cadila's Is A Premium Valuation For A Mid-Sized Pharma Company

Cadila Healthcare, the Rs 3,000-crore Gujarat-based pharma company, has been on a steady growth path over the past couple of years. Given its track record and the potential for growth, going forward, the stock has been undergoing rerating of sorts. Rising by over 60% during the past five months, Cadila's stock has outperformed the Sensex, which has increased by a mere 8% during the same period.

While the company is one of the top five companies in the domestic formulations market, it earns onethirds of its revenues from the international generics business. The company's growth in topline, primarily comes from its exports business, which it has grown organically as well as inorganically.

It's one of the fastest-growing generic companies in the US, using its own active pharma ingredients (APIs) in half of the products. It is actively strengthening its regulatory drug pipeline. In FY09, the company acquired Spanish generic player Laboratories Combix and took a majority stake in South Africa's Simalya Pharmaceuticals. Despite having presence in regulated markets, the company has not faced any compliance issues with any overseas drug regulator.

Cadila's contract-manufacturing business built through joint ventures with Switzerland-based Nycomed, US-based Hospira and others is also gradually contributing to company's growth.

The company has also been investing in innovative research and has a new drug discovery and development agreement with Eli Lilly in the area of the cardiovascular segment. This agreement has the potential to accrue milestone payments for Cadila in case Eli Lilly commercializes a molecule.

The company's revenues and earnings have been on a steady improvement. In the first half of FY10, the company has clocked a 26% YoY growth in net sales and nearly 40% rise in net profits. The company, in its presentation to investors, has communicated of its intention to cross sales of over $1 billion (more than Rs 4,500 crore) by 2010.

The company is valued at little over thrice its net revenues (over the past four trailing quarters). It is currently trading at a price-to-earnings multiple of 23. This is a premium valuation for a mid-sized Indian pharma company. The company will have to continue delivering growth to sustain these valuations, going forward.