FY20/21e EPS reduced by 17/8% owing to weak margin; TP revised to Rs 2,900; ‘Add’ maintained due to earnings outlook
Q2FY20 core Ebitda missed our estimate by 11% due to weak US show and lower core gross margin. US sales declined 14% q-o-q on price erosion and supply disruption due to logistics issues. This also led to lower core gross margin despite higher reported gross margin due to CNS asset sale. Management highlighted that supply disruption will normalise from Q3 and SG&A was higher by Rs 4.9 bn (as had one-offs). While it remains optimistic about new launches, there’s not much clarity on approval timelines of key products (gNuvaring, gCopaxone).
We cut FY20/21 EPS estimate by 17%/8% on weak margin and revise target price to Rs 2,900 (20x H1FY22e EPS) vs. Rs 2,820 (20x FY21e). Maintain Add rating on the stock as we expect earnings to improve with scale-up of recent (13 in H1) and new launches (over 30 planned in FY20) in the US coupled with improving execution in EM (India, Russia, China).
Sales led by one-offs; US sales weak
Revenue at Rs 48 bn grew 26% y-o-y (14% above our estimates). US sales (~30% of sales) declined 14% q-o-q to $203 mn due to price erosion (on select newer products), lower volumes, voluntary Ranitidine recall and supply disruption due to logistics issues. This was partially offset by 8 launches in Q2. On adjusted basis, US sales marginally declined q-o-q. EM sales grew 10% y-o-y: (i) Russia/CIS grew 8%/21% y-o-y driven by increase in volumes (in Russia), new launches (in CIS) and better realisations; (ii) RoW grew 9% y-o-y driven by new products, volume traction partly offset by price erosion in key molecules. There was strong growth in EU (44% y-o-y), PSAI^ (18% y-o-y) while India grew 9% y-o-y. Proprietary Products (PP) grew 472% y-o-y led by Rs 7.2 bn one-off income from Upsher-Smith for sale of Tosymra & Zembrace.
Core gross margin remains weak
Gross margin (GM) at 70.9% (as per Ind-AS) was down 156 bps y-o-y/up 217 bps q-o-q (as per IFRS @57.5%; +251 bps y-o-y/+586 bps q-o-q) led by one-offs (including impact from Ranitidine recall) and US price erosion. It was partially offset by higher one-time PP sales. Adjusted for one-offs, GM (as per IFRS) was 51.5% (-352 bps y-o-y/-17 bps q-o-q).
Core Ebitda margin remains weak
Staff/R&D expenses declined 5%/11% y-o-y. SG&A grew 60% y-o-y due to Rs 3.6-bn one-time impairment charge on product related intangibles and one-time Rs 328 mn transaction cost associated with asset sale to Upsher-Smith.This led to Ebitda of Rs 10.6 bn (+40% y-o-y) and margin of 22.1% (+221 bps y-o-y/+288 bps q-o-q). Adjusted for one-offs, one-time income in PP (Rs 7.2 bn), intangible impairment charges and asset sale related transaction costs, core Ebitda was Rs 7.3 bn (-3% y-o-y) & margin at 17.9% (-195 bps y-o-y/-128 bps q-o-q).