Buy Sequent Scientific Ltd For Target Rs.210 - Yes Securities
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Worst of margin woes may be behind
Result Synopsis
Sequent clocked a steady growth quarter with 11-12% growth across API and formulations businesses while margin did improve on sequential basis as higher margin API share increased ~200bps QoQ. Management expects to implement price increase at least in some part of long term contracts whose benefit would be gradually seen over course of FY23.
API business rebounded on weak 3Q base as expected though still fell short of expectations. New CEO reiterated no change in Sequent evolution as focus remains on key markets of India, Lat Am, Turkey coupled with US ambition over next 3 years. Gross margin improved 100bps in 4Q and company guided to better operating margin with aspiration to reach FY21 margin – though unlikely in current or next fiscal. Rebound in API business on a weak FY22 base, continued growth in formulations imply that Sequent has fared in line with our revenue expectation. Margin has been a different story as company grapples with a high COGS H2 FY22 with some spill over in H1 FY23 – though there would be ability to take price hikes on long term contracts, these come with a lag. We again cut gross margin estimate leading to OPM cut of ~200bps each for FY23/24. Revised ESOP costs of Rs320mn (vs previous Rs156mn in FY23) accounts for 40% share (balance 60% accounted by lower margin assumption) in FY23 EPS cut of 40%. API supply to top 10 animal health company and presumed normalization of input costs lead to lower earnings cut in FY24. Reckon cutting target multiple of 35x would reinforce near term pain which we believe is captured in our revised earnings. Hence retain BUY based on unchanged 35x PE with revised TP Rs210 (earlier Rs260).
Result Highlights
* Revenue up 6% YoY to Rs 3,837mn, lower than our estimate of 11% growth YoY.
* LATAM performed exceedingly well growing at 42% YoY. Constant currency growth in Turkey was offset by foreign currency fluctuations and led to degrowth in 4Q.
* EMs and India continue to perform well with India surpassing Rs1bn in FY22.
* API sales rebounded on weak 3Q base at 14% YoY (11% CC)
* Operating margins came in at 10.1%, 65bps higher sequentially on improved mix.
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