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In line; see cost headwinds over the near term

Work-in-progress to build a niche product pipeline

* ARBP delivered an in line 4QFY22. Increased competitive intensity in US Generics and higher OPEX impacted profitability in 4QY22 on a YoY basis.

* We cut our FY23/FY24 EPS estimate by 9%/12%, factoring in: a) a higher price erosion in the US base business, b) greater RM/logistics cost, and c) moderation in the EU/ARV business. We value ARBP at 12x 12M forward earnings to arrive at our TP of INR640.

* While the near term outlook may be subdued on the margin front, ARBP continues its effort towards: a) building its niche product pipeline (injectables/Biosimilars), b) robust pace of approvals/launches in US Generics, c) and surplus cash available for capital expenditure. We maintain our Buy rating.

Margin stable QoQ, but down YoY due to business mix/OPEX

* Sales fell 3.2% YoY to INR58.1b (est. INR59.3b). Formulation sales (fell 6% YoY to INR49b) led the overall decline.

* US Formulations sales declined by 4.5% YoY to INR27.3b (47% of sales). ARV sales fell 52% YoY to INR2.4b in 4QFY22 (4% of sales). Europe Formulations sales were almost flat YoY at INR15.4b (27% of sales). Sales for the same in growth markets grew 28% YoY to INR3.9b (7% of sales).

* Gross margin (GM) fell 340bp YoY to 56.5% due to business mix and cost pressure on some key raw materials.

* EBITDA margin contracted at a higher rate by 440bp to 16.8% (est. 16.4%) due to higher other expense/staff cost (up 90bp/50bp as a percentage of sales) in 4QFY22.

* EBITDA fell 24% YoY to INR9.7b (est. INR9.7b).

* Adjusting for the forex gain of INR197m and exceptional items of INR1.6b, PAT declined by 27% YoY to INR5.7b (est. INR5.2b) due to lower EBITDA margin, but partially offset by a lower tax rate YoY in 4QFY22.

* Revenue/EBITDA/PAT fell 5%/19%/19% to INR235b/INR44b/INR26b in FY22.

Highlights from the management commentary

* The Specialty business, comprising oncology oral solids, hormonal oral solids, and injectables, clocked sales of USD438m in FY22. ARBP maintained its sales guidance of USD650-700m by FY24.

* The ARV business is expected to sustain its normalized 4QFY22 quarterly sales run-rate in FY23.

* R&D expenses are expected at 6% in FY23.

* Overall capex over the next two years stands at USD425m.

* ARBP’s Specialty business had 11 launches in FY22. Targeted launches for FY23 are 20.

* Average raw material/freight cost increased by 18%/42% YoY in FY22.

* ARBP expects price erosion in the US to continue for two quarters at least

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