Scalable model with proven appetite to use high FCF to push growth; initiated with ‘Outperform’ and TP of Rs 770
Eris is a pure play in the India pharma market, with presence in the fast-growing and high-entry-barrier cardiac and diabetes drugs. Eris has delivered strong performance (20% sales CAGR over FY12-17) with strong product selection (73% of portfolio in growth phase) and marketing focused on super-specialists and specialists.
Scalable model with appetite to use high FCF to accelerate growth
Eris has proven its business model is scalable, with (1) ability to create large and growing brands (top two brands are Rs 1 billion), (2) an already top-five position in prescription share from cardiologists and diabetologists, and (3) leveraging its high FCF to grow inorganically in new therapies. Our bottom-up analysis shows existing portfolio should grow at 15-16% CAGR (higher than peers) despite limited new launches in diabetes and cardiac. We present case studies on how Sun and Lupin grew to >4x the size in India in the past ten years when their sizes were comparable to Eris’ and had similar constraints. The strategy was to go for more in-licensing drugs and scale up other therapies. Sun and Lupin used their India FCF to boost export presence but Eris is using FCF for scaling up in India. Eris has already branched into CNS, gynae and pain, which should boost its growth beyond 15%.
Turnaround of Eris’ recent acquisitions could re-rate stock
Eris acquired four loss-making units in last one year to strengthen its CNS, gynae and pain portfolio. The synergies are significant (IRR of 15-20%) and as Eris turns them around over next two quarters, market will be more convinced about Eris’ ability to grow through acquisitions (Eris will be net cash again by FY18 end).
Best return profile and growth trajectory
Eris’ profit CAGR of 24% (FY17-20) and RoCE (ex-cash) at 100% is the highest in the sector. EBITDA margins could further expand as comparison with Sun and USV shows Eris’ sales force productivity is half of peers. We initiate with Outperform and TP of `770 (22x FY20E PE). Key risks: implementation of ‘one company, one brand’ policy, mandatory prescription by generic names and expansion of price cap list.
Existing portfolio should grow at 15% revenue CAGR
Our bottom-up analysis suggests that existing portfolio of Eris (without acquisitions) should grow revenues at 15% CAGR with cardiac and diabetes growing faster. In diabetes, Eris should grow at 17-18% CAGR. The execution is mixed in cardiac. Overall Eris is still gaining market share in the cardiac therapy and we expect Eris’ cardiac franchise to grow at 16% CAGR.