Navigating well in turbulent times
* A resilient US business and a sharp reduction in net debt were the key positives in an otherwise in-line Q1 for ARBP. Unlike its peers, ARBP's growth in the API business was relatively muted given the portfolio’s skew toward anti-biotics (50% of the API business).
* The weakness in the US generic injectables portfolio was offset by Natrol (vitamin portfolio), while Oral solids were largely flat qoq. ARBP expects to maintain the US trajectory with 50+ launches in FY21 (6 done so far). However, recovery in the injectables portfolio should be gradual over 6-9 months given intermittent lockdowns in the US.
* ARBP is slowly graduating its portfolio complexity, and trials/filings for biosimilars, depot injections, transdermals etc. will commence from H2FY21, leading to a step up in R&D spends in H2. For FY21, ARBP has guided R&D spends at 5.5% of sales (vs. 4.3% in Q1).
* We raise FY21/22/23E EPS by 6%/7%/6% and revise the TP to Rs1,000, valuing the stock at 17x Sept'22E EPS (vs. 15x earlier). The higher multiple is to account for faster-thanexpected debt reduction. Retain Buy and OW stance in EAP.
US business revenue was resilient at US$412mn vs. US$382mn estimate, as the decline in US generic injectable portfolio (Covid-19 impact and Ertapenem competition) was offset by strong growth in Natrol (vitamin business, +38%qoq). The oral solids portfolio was largely flat qoq (-3% qoq) despite Q4 witnessing strong growth due to upstocking. EU (-5% yoy) and growth markets (-8% yoy) normalized post upstocking in Q4, while the ARV business was strong (+34% yoy, led by recent tender wins and TLD shift). Unlike peers, ARBP's API business grew at a moderate 7%, given 50%+ of the portfolio is anti-biotics, where the traction has been weak. The remaining portfolio has grown at 29%+ qoq. Adj. margins of 22.2% (adjusted for the provision for intangible write-offs of Rs600mn) were better than expected amid no tailwinds from lower marketing spends (as ARBP does not have a branded business). However, the higher margins should taper off in the remaining 9M as R&D spends increase (FY21 guidance of 5.5% of sales vs. 4.3% in Q1).
Balance sheet improves further: Net debt was reduced further by US$168mn (in addition to the US$365mn reduction in FY20). ARBP is on track to achieve its debt reduction guidance of US$200-250mn in FY21 and is targeting to be debt-free by FY22 - note that this is mainly operational-led and management alluded that utilization of factoring has come off in the last two quarters. Receivables days have also declined sharply during the quarter (at 49 days, - 16 days qoq), driven by better collections in the US.
Maintain BUY: We raise FY21/22/23E EPS by 6%/7%/6% and revise TP to Rs1,000, valuing the stock at 17x Sept'22 EPS (vs. 15x earlier). The higher multiple is to account for faster-thanexpected debt reduction. Retain Buy and OW position in EAP. Strong execution/leverage reduction should drive stock outperformance. Risk: any slowdown in the US trajectory/compliance issues.
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