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Our view

Sequent Scientific made a sequential comeback across API business with 21% QoQ growth though still down 10% YoY. Formulations also saw 8% rise driven by Lat Am and Europe while Turkey was impacted by currency depreciation (local currency sales clocked double digit growth). Demand scenario is set to pick up in API driven by 1) increase in customer buying 2) gradual reopening of schools in H2 benefiting Albendazole business and 3) order execution for a top 10 animal health customer. Q2 marks the bottom of margin and impact of price increase to be visible from Q3 onwards. Formulations business to be aided by vaccines supplies starting from Turkey next year and continued growth in existing business. We lower gross margin assumption for FY22 with rebound in FY23; revenue forecast and EBIDTA margin (ex-ESOP) trajectory in the medium remain largely intact. We build in a Q3 revival in API and normalized margin from Q4 and retain BUY with 6% cut to FY24 EPS; accordingly revise TP to Rs280 (Rs300 earlier) on unchanged 35x FY24 EPS. Key risk is YoY decline in API sales in H2 and lack of adequate pass through of elevated input costs.

Result Highlights

* Sequent Scientific clocked a revival with API sales up 21% QoQ (+25% QoQ exAlbendazole) though still down 8% YoY as customer stocking curtails normalized offtake; outlines stronger order book in Q3 and Q4 and H2 growth back on track. Overall revenues +9% QoQ

* API – WHO program lagging due to closure of schools (no deworming program), recovery seen in H2

* API - Dedicated sales team and enters in to first supply arrangement with top 10 animal health co – impact seen in FY23

* Formulations up 8% YoY, driven by Lat Am and Turkey though 11% YoY growth in Turkey was eaten away by currency depreciation

* Europe back on track with +10% YoY rise in revenues; India moderates t0 4% YoY on high base due to Zoetis commercialization in the base quarter

* Gross margin – big impact of input cost pressure leading to ~500bps drop in gross margin; Pre ESOP EBIDTA margin at ~10% (vs 11.2% in Q1) and 5.5% post ESOP (on better cost control QoQ) vs our estimate of 9%

* Tax reversal aided PAT. Bal sheet – Increase in inventory to support H2 growth especially in APIs, Op CF declines on lower margin & increased WC

Valuations

Retain BUY with 6% cut to FY24 EPS and accordingly revised TP Rs280 (Rs300 earlier) on 35x FY24 EPS. Key risk is further decline in API sales in H2 YoY and lack of adequate pass through of elevated input costs.

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