Hold Cadila Healthcare; target Rs 778: Microsec

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Hold Cadila Healthcare; target Rs 778: Microsec

Microsec has recommended hold rating on Cadila Healthcare with a target price of Rs 778, in its November 19, 2011 research report.

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Microsec has recommended hold rating on Cadila Healthcare with a target price of Rs 778, in its November 19, 2011 research report.

"Cadila Healthcare (Cadila) is a leading pharmaceutical company with a strong presence in domestic and global markets. Cadila expands its market presence through Joint Venture, acquisition and tie ups with different companies all over the world. With the investment in R&D and manufacturing facilities, the company is likely to become research oriented company which has huge opportunities; as global pharmaceutical companies want to give out their research to India due to cost cutting, going off-patent and US FDA issues. We expect Cadila has good prospects in the long run. However, domestic pricing policy and stiff competition in consumer wellness segment from multinationals, impedes our view for the short term and we give "Hold" rating to the stock.

• Distribution Channel along with competitive Research Team increase product launch to boost top line growth.
• Organic and Inorganic Strategies to drive growth.
• The rising employee cost and elevated debt impact on margins that makes us cautious in short run but is likely to be positive for long run as it is due to the investment in R&D, manufacturing facility and acquisition of Bremer for accessing the key animal healthcare markets across Europe, South America, Asia, Africa and Nesher Pharma to distribute and manufacture generic controlled substances in the American market. Past credibility gives us assurance that the management is capable to manage properly by expanding product portfolios and market presence.
• Cadila focuses on the fast growing affluent, health conscious segment through its 73% subsidiary, Zydus Wellness, but this segment currently faces stiff competition from the multinationals.

We adopted Discounted Cash Flow (DCF) technique to value the stock of Cadila Healthcare Ltd. With the calculation of 8.84% Risk Free Rate, 2.55% Market Risk Premium and 0.57x of Beta, the company's cost of equity stood at 10.29% in Capital Asset Pricing Model (CAPM). With the post tax debt cost of 6.24%, debt to equity ratio of ~0.05x for FY2012E and cost of equity of 10.29%, we arrived at WACC of 10.10%. In addition to that, we assumed terminal growth rate of 2.00% for the stock post FY2016. With all of these, we arrived at a target price of Rs 778 which is 9% upside of its current stock price of Rs 712.55," says Microsec research report.

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To read the full report click on the attachment