Buy Eris Lifesciences Ltd For Target Rs.870 - Motilal Oswal
In line 4QFY22 at the operational level; geared up for launches in FY23
Specialty segment gets a boost from the Oaknet acquisition
ERIS delivered an operationally inline 4QFY22. It ended the second consecutive year with earnings growth in the a healthy teens compared to stable earnings over FY18-20. The acquisition of Oaknet Healthcare (Oaknet) enables ERIS to add a Dermatology franchise, expand into the Cosmetology space, and improve synergy in the Women’s Healthcare segment.
We tweaked our FY23/FY24 EPS estimate by (3%)/2% to factor in: a) addition of the Oaknet business, b) scale-up in already launched products (Drolute, Xsulin, Zomelis, Gluxit) , c) strong pace of launches over the next 12-15 months, and d) upcoming promotional expenses. We continue to value ERIS at 22x 12-month forward earnings to arrive at a TP of INR870.
We remain positive on ERIS on the back of superior execution in the CardioMetabolic segment, scale-up in Dermatology and Cosmetology therapy, and a healthy product pipeline over the next three-to-four years. We reiterate our Buy rating.
Oaknet acquisition – New space addition at decent valuation
ERIS aims to deliver 13% sales CAGR at INR2.5b, with an EBITDA margin of 20% (from 10% currently) from the Oaknet business, led by launches in Dermatology, price hikes in existing products, enhancing of its franchise in the Cosmetology segment, and cross-selling of Women’s Healthcare products.
On a FY24 basis, the acquisition is at an EV/sales multiple of 2.6x and at an EV/EBITDA multiple of 13x, which is attractive compared to the industry average of 4-5x/15-16x
Promotional efforts for launches lowers margin in 4QFY22
Revenue grew 10% YoY to INR3.1b in 4QFY22 (est. INR2.9b).
On a YoY basis, ERIS’ Cardio-Metabolic (60% of sales)/CNS (8%)/Women’s Healthcare (4%) segment grew 14.1%/26%/16.5% v/s an industry (IPM) growth of 2.8%/3.6%/2.4% in 4QFY22.
In 4QFY22, VMN (19% of sales) fell 5.5% YoY v/s a stable IPM.
Gross margin expanded by 150bp YoY to 79.8% on a superior product mix.
EBITDA margin, however, contracted by 230bp YoY to 31.7% (est. 33.7%) due to higher employee costs/other expense (+140bp/+240bp as a percentage of sales).
EBITDA grew at a moderate 2.5% YoY to INR969m (est. INR965m).
PAT grew at a higher rate of 17% YoY to INR800m (est. INR736m), led by a lower tax rate.
Revenue/EBITDA/PAT grew 11%/12.6%/14.3% YoY to INR13.5b/INR5b/ INR4b in FY22.
ERIS’ Cardio-Metabolic/CNS/Women’s Healthcare segment grew 15.9%/ 33.2%/24.4% YoY v/s a growth of 7.6%/8.7%/15% for the IPM in FY22.
Its VMN portfolio struggled with a growth of 8.6% YoY v/s a growth of 12.2% for the IPM in FY22.
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