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Strong recovery in exports drives Q1

Poly Medicure’s (Polymed) Q1FY23 performance was a miss on the profitability front due to lower margins while revenues were on expected lines. Revenues grew 17.4% YoY to Rs2.5bn (I-Sec: Rs2.5bn) mainly due to strong recovery in exports. Domestic growth was impacted due to high base of covid. EBITDA margin stood at 18.7% against our estimates of 21.5% mainly due to one-off MTM losses. Also, raw material and freight costs have started softening; hence we expect improvement in margins from Q2FY23 onwards. Adj. PAT declined 28.3% YoY to Rs270mn (I-Sec: Rs369mn). We like the company mainly due to its: 1) strong presence in the fast-growing medical disposable segment, 2) industry tailwinds, 2) beneficiary of ‘China+One’ strategy, 3) leading market share in key categories, 4) entry into larger markets like the US, 5) expansion into marginaccretive segments, and 6) strong financials. Maintain BUY with a revised target price of Rs849/share (earlier: Rs925).

? Business review: Domestic business declined ~40% YoY in Q1FY23 due to incremental sales of ~Rs200mn from covid-led product sales in Q1FY22. Excluding covid, domestic growth is expected to remain strong on the back of industry tailwinds, capacity addition, new launches and enhanced penetration. Exports grew by a robust ~109% YoY to Rs1.6bn due to low base and strong demand across markets. We expect exports to grow by 18.3% over FY22-FY24E mainly due to lower base, deeper penetration in the existing markets, and increase in contribution from the US. Elevated cost of raw materials, freight charges as well as MTM loss in mutual fund investment pulled down the EBITDA margin by 740bps YoY to 18.7%. Softening of raw material and freight costs and currency tailwinds are likely to improve margins from Q2FY23.

? Key concall highlights: 1) FY23 guidance: >20% overall revenue growth, 16-17% growth in exports, 200-250bps QoQ improvement in margins in Q2FY23; 2) US business has been delayed by quarter and is now expected to start from Q3FY23; 3) renal segment sales in FY23 is guided at Rs1bn.

* Outlook: We expect revenue/EBITDA/PAT CAGRs of 17.2%/20.8%/20.6% over FY22-FY24E. Revenues are likely to be driven by strong growth in both domestic and export markets on the back of new launches and geographical expansion. We forecast EBITDA margin to increase by 110bps over FY22-FY24E with softening cost inflation and change in product mix. RoE and RoCE are estimated to reach decent levels of 16.6% and 15.3% respectively in FY24E.

* Valuation and risks: We maintain our sales estimates though we cut EPS by 7-9% for FY23E-FY24E due to lower margins in Q1FY23 and inability to pass-on price inflation to end-user. We remain positive on Polymed’s long-term outlook amid multiple growth drivers in both domestic and export markets. Maintain BUY with a revised target price of Rs849/share based on 25x FY24E EBITDA (earlier: Rs925/share). Key downside risks: Intensified competition, disruption in the distribution network

Valuations

We estimate earnings to grow at a CAGR of 20.6% over FY22-FY24E on the back of revenue CAGR of 17.2%. Revenues are likely to be driven by strong growth in both domestic and export markets as a result of new launches and geographical expansion. EBITDA margin will likely remain under pressure in the near term due to cost inflation and adverse sales mix; however, we believe margins would improve from FY23E due to normalization of raw material and freight costs and change in product mix. We forecast RoE and RoCE at 16.6% and 15.3% respectively in FY24E.

The stock currently trades at valuations of 41.7x FY23E and 32.7x FY24E earnings and EV/EBITDA multiple of 27.0x FY23E and 21.2x FY24E. We like the company mainly due to its strong presence in the fast-growing medical disposable segment, industry tailwinds, leading market share in key categories, entry into larger markets like the US, expansion into margin-accretive segments, and strong financials. We maintain our BUY rating on the stock with a revised target price of Rs849/share based on 25x FY24E EBITDA (earlier: Rs925/share).

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