Credit Suisse has downgraded Cadila Healthcare to neutral as the stock is already factoring in clearance of the Moraiya facility and any delay could impact high recovery assumed in FY18. It has cut multiple for the US generic business as it expects further impact to generics from more channel consolidation. Ex-US business for Cadila has been weak for the past three years (sub 10 percent sales CAGR) and therefore, the burden of growth rests heavily on Moraiya clearance, the brokerage house says. However, the target price remained unchanged at Rs 405 per share. It feels till Moraiya is cleared, earnings growth is likely to be low as base sales have declined sharply due to the decline in arthritis drug HCQS prices and market share loss in Tamsulosin, Niacin ER and Tricor; key site-transferred products from Moraiya are now expected only next year—Toprol, Prevacid solutab and Sirolimus; and margins on Asachol Authorised generic is likely to be low at 18-22 percent. Post the establishment inspection report at Moraiya facility, Cadila stock has run-up around 15 percent and is now trading at 21x FY18 EPS. Cadila has completed remediation for Moraiya and management had indicated that they expect a face-to-face meeting in September. The brokerage says it expects warning letter resolution by end-FY17, but there is a possibility of delay beyond Q4FY17 as well. Credit Suisse further says the injectable unit of Cadila was last inspected four years ago in February 2012; hence, it is likely that the reinspection will be a full-fledged inspection across all units.
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