Merrill Lynch is bullish on Cadila Healthcare and has maintained buy rating on the stock with a target of Rs 425.
Merrill Lynch report on Cadila Healthcare:
Strategic acquisition in Brazil; Maintain Buy
Acquisition of Brazilian company Nikkho- a reasonable deal
Cadila has signed an agreement to acquire 100% stake in a mid-sized Brazilian company Quimica e Farmaceutica Nikkho do Brasil Ltda. (Nikkho) for US$26mn, which values the deal at 1x sales (CY06) and less than 8x EV/EBITDA multiple. We view this deal as strategic since it enables Cadila to strengthen its position in the fast-growing US$1.2bn Brazilian generics market.
Key highlights from the deal
Consolidates presence in the high-growth Brazilian generics market (25% CAGR)
Access to branded generics portfolio of 22 marketed products and 50 registrations in niche therapies like gynecology, neurology & respiratory
Access to local manufacturing capacities in injectibles and liquids
Expected to be EPS accretive from second year of acquisition
Likely 5-7% EPS accretive in FY09E
Nikkho had annual sales of USD 26 million (CY06) with EBITDA margins of ~13-14% and we estimate current net margins of around 5-7%. Taking into account Cadila's aggressive expansion plans in Brazil, we estimate the deal to be EPS neutral in FY08E and 5-7% EPS accretive in FY09E.
Maintain Buy with robust business outlook
Maintain Buy with a PO of Rs 425 per share. Valuation is attractive at 17.8x FY08E and 15x FY09E EPS, which are at 11% and 20% discounts to the sector average.
