Broking house, Sharekhan is bullish on Cadila Healthcare and has recommended buy rating on the stock with a target of Rs 425.

Sharekhan report on Cadila Healthcare:

Zydus Cadila (Cadila) has acquired a 97.5% stake in Mumbai-based Liva Healthcare(Liva), a mid-sized Indian pharma company, in an all-cash deal. The all-cashtransaction will be funded through cash accruals and debt. The size of the dealhas not been disclosed.

The acquisition of Liva will enable Cadila to foray into the Rs 1,500-crored ermatology segment in India and thus strengthen its domestic product portfolio,allowing it to offer a more comprehensive product range. With Livaís 325-peoplesales force, which already has established relationships and strong brand equityamongst the dermatologists, cosmetologists and beauticians, Cadila will be ableto make fast in-roads into this rapidly growing segment.

Cadila has received three product approvals from the US Food and Drug Authority(US FDA) in quick succession. The company has received the final approval tomarket Azathioprine tablets of 50mg strength and has received tentative approvalsfor Divalproex Sodium Extended Release tablets in strengths of 250mg and 500mg,and Venlafaxine Hydrochloride tablets in strengths of 25mg, 37.5mg, 50mg, 75mg and 100mg.

We estimate the above three products would together contribute $13.1 million(approximately Rs40.5 crore) in FY2008E and $15.4 million (approximately Rs69crore) in FY2009E to Cadilaís total revenues. The same three products are likelyto contribute approximately Rs0.90 to Cadilaís FY2008E earnings and Rs1.10 toits FY2009E earnings.

At the current market price of Rs326, Cadila is trading at 14.8x its estimatedFY2008 earnings and at 12.2x its estimated FY2009 earnings. The stock hasunderperformed the market in recent times, but we believe that as Cadilaísinternational efforts start translating into gains and growth in the domestic marketrebounds, the stockís performance would improve. Considering the strong growthmomentum of the company, we maintain our Buy recommendation on the stockwith a price target of Rs 425.

Zydus Cadila acquires Liva Healthcare

Cadila has acquired a 97.5% stake in Mumbai-based Liva, a mid-sized, Indianpharma company, in an all-cash deal. The all-cash transaction will be funded throughcash accruals and debt. The size of the deal has not been disclosed.

Valuation & view

The acquisition of Liva will enable Cadila to foray into the  Rs1,500-crore dermatology segment in India and thus  strengthen its domestic product portfolio, allowing it to offer  a more comprehensive product range. With Livaís 325-people  sales force, which already has established relationships and  strong brand equity amongst the dermatologists,  cosmetologists and beauticians, Cadila will be able to make  fast in-roads into this rapidly growing segment. 

Further, the above three product approvals are expected  to strengthen Cadilaís US product portfolio. Cadila has filed  44 abbreviated new drug applications (ANDAs) till date. As  these ANDAs get approved by the US FDA, the same would  translate into a strong product portfolio. With a target to  file 20-25 ANDAs and launch six to seven new products  every year, we believe Cadila is set to reap handsome gains  from its US business. 

At the current market price of Rs326, Cadila is trading at  14.8x its estimated FY2008 earnings and at 12.2x its  estimated FY2009 earnings. The stock has underperformed  the market in recent times, but we believe that as Cadilaís  international efforts start translating into gains and growth  in the domestic market rebounds, the stockís performance  would improve. At these levels, the stock is available near its 52-week low level. Considering the strong growth momentum of the company, we view this as a strong buying opportunity and hence maintain our Buy recommendation on the stock with a price target of Rs425.