While Revlimid is an interesting opportunity, it would not fructify in the next few months. Net working capital days reduced by three on a sequential basis.
The renewed strategy in the US, the enhanced focus on branded generics in emerging markets and the cost-control initiatives are promising steps that bolster DRL’s earnings prospects. We raise our EPS estimate by 7.3%/8.2%/9.2% for FY20/21/22 to factor in the better outlook in India/Russia, the higher gross margin and the scope of enhancing operating leverage. However, we maintain our ‘neutral’ rating as we await a better entry point.
Revenue increased ~14% y-o-y to Rs 4,380 crore (our estimate: Rs 4,240 crore) in Q3FY20, driven by all business segments (except the US which grew moderately by 8% y-o-y to Rs 1,600 crore — 36% of sales). Pharmaceutical Services and Active Ingredients (PSAI) segment (16% of sales) grew at 16% y-o-y to Rs 690 crore.
India business (17% of sales) was up 13% y-o-y at Rs 760 crore, while Europe business (7% of sales) grew 52% y-o-y. Emerging markets (21% of sales) was up 19% y-o-y to Rs 920 crore, led by CIS (+26% y-o-y) and Russia (+20% y-o-y). Gross margin expanded 20bp y-o-y (+260bp q-o-q) to 54.1% on an improved product mix. Controlled cost (SGA expense/R&D spend down 130bp y-o-y/50bp y-o-y) led to ~200bp y-o-y expansion in the Ebitda margin to 23.2%. Ebitda was up ~25% y-o-y at Rs 1,020 crore (our estimate: Rs 900 crore). DRL reported a loss of Rs 570 crore due to impairment of Rs 1,320 crore on account of g-Nuvaring (Rs 1,100 crore) and other intangibles (Rs 200 crore). Adjusting for the same, PAT came in at Rs 590 crore (our estimate: Rs 450 crore), up 23% y-o-y.
With 22 ANDA launches in 9MFY20, DRL maintained target of 30 for FY20. USFDA has initiated an inspection at the Srikakulam API site. While Revlimid is an interesting opportunity, it would not fructify in the next few months. Net working capital days reduced by three on a sequential basis. Growth in Russia was partly led by winning of Rituximab tender business. PDUFA date for oral Celecoxib is in May 2020.
We expect 12% earnings CAGR over FY19-22 led by superior execution in the US/India/China and other key geographies. We continue valuing DRL at 20x 12M forward earnings to arrive at a TP of Rs 3,000 (prior: Rs 2,650).
While the outlook remains robust, we maintain ‘neutral’ as we await a better entry point.