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‘Biologics/Small Molecules drive earnings’
* Subdued Syngene sales growth offset by Biologics/Small Molecules: 1QFY20 sales grew 30% YoY to INR14.6b (v/s our est. INR16b), led by Biologics (+96% YoY; 33% of sales) and Small Molecules (+20% YoY; 33% of sales). However, overall growth was dragged to some extent by moderate 4% YoY growth in Research Services (29% of sales) and 9% YoY decline in Branded Formulations.
* Margins at record high: BIOS delivered record high gross margin at 66.5% (up 1,020bp YoY/240bp QoQ), led by increased share of Biologics in total sales coupled with profit share component. EBITDA margin improved at a relatively lower rate of 870bp YoY to 29.8% (our est. 27.5%) due to increased R&D spends (5.4% of sales v/s 3.9% YoY). Strong revenue growth and better margins led 80% YoY growth in EBITDA to INR4.4b (our est. INR4.4b). Adj. PAT at INR2.1b (our est. INR2.6b) grew at a lower rate of 78% YoY due to higher depreciation and lower other income.
* Concall highlights:
(a) Increased share of Biologics and profit share component in 1QFY20 led the strong improvement in margins.
(b) Clinical trials related to bevacizumab biosimilar are on track with submission expected in the US and Europe by end-FY20.
(c) EMA submission for the insulin Aspart is planned in 2HFY20 and the USFDA submission is expected in mid-CY20.
(d) Gross R&D spends were lower in 1QFY20; BIOS has guided it to be 15% of revenue (ExSyngene) for full-year FY20.
* Valuation and view: We lower our EPS estimates by 11%/10% to INR8.5/INR10.2 for FY20/FY21 to factor in Syngene’s weak performance and Branded Formulation sales in the UAE. Accordingly, we have revised our price target to INR255, valued at 26x (unchanged) 12M forward earnings. While BIOS has been delivering strong earnings growth on the back of healthy traction in Biologics, we maintain Neutral as valuation leaves limited upside from current levels.
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