Results reflected further synergy gains from Unichem acquisition; EPS estimates for FY19-21 trimmed 1-4%.
TRP’s domestic revenues were 3% lower than estimates. However, adjusting for one-time valsartan recall related charges, Ebitda margins further expanded 80bps q-o-q to 26.3%, reflecting continued synergy gains from the Unichem acquisition, which we estimate is approaching 30% Ebitda margin, and is on track for cash break-even by the end of FY2019. Revenue synergies and market share gains are now key for further value accretion from Unichem.
Minor disappointment on domestic revenues, though, solid margin performance continues TRP’s Q2FY19 revenues were 3% lower than our estimates, with domestic formulations growing at 34% y-o-y. On a pro-forma basis, this translates into a 7% y-o-y decline for Q2FY19 and 9% y-o-y growth for 1HFY19, which, we believe is a better indicator given the GST stocking adjustments in Q2FY18, with the mgmt too guiding to 18% y-o-y growth for Q2FY19 adjusting for GST. The US surprised positively with sales of $57 mn. Brazil was 13% lower than estimates and remains a challenging market, while EU and other markets were largely in line with estimates.
Gross margins at 71% were in line with estimates, though Ebitda margins at 25% were 170bps lower than estimates largely due to a one-time Rs 250 mn impact due to valsartan recall in the US. Adjusting for the valsartan recall, Ebitda margins further expanded to 26.3% (+80bps q-o-q, -40bps vs KIE), benefitting from Unichem cost synergies, and was 4.6% lower than estimates. A combination of lower other income and lower tax offset each other, resulting in adjusted PAT coming in line with our estimates. Net debt declined by Rs 3.6 bn in 1HFY19.
Productivity improvements playing out
According to our estimates, Unichem sales were in the region of `2.3-2.4 bn, on track to achieve our FY2019 revenue estimate of Rs 9 bn for Unichem. More importantly, TRP’s adjusted Ebitda margin of 26.3% in Q2FY19 is particularly noteworthy as it implies that Unichem’s Ebitda margins are already approaching 30%, up 10pps within three quarters of the close of the transaction with the company on track for cash break-even of the acquisition by end of FY2019. We believe TRP has achieved the bulk of its near-term cost synergy target, with revenue synergies now critical for significant value accretion. Q2FY19 saw above secondary market share gains for top-5 brands, including losartan franchise. Mgmt also highlighted improvements in field force productivity, with the combined entity productivity now approaching TRP’s pre-acquisition levels, though, we see further scope for improvement.
Marginally trim EPS estimates
Our Ebitda estimates remain largely unchanged, though, we trim our FY2019-21 PAT numbers by 1-4%. TRP shares are trading at 27X FY2020 EPS and 14X FY2020 EV/Ebitda, and 21X and 12.3X FTY2021 P/E and EV/Ebitda respectively.