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Revenue surged, Margins Improved

Zydus Lifesciences Ltd. is one of India’s leading vertically integrated pharmaceutical companies, with presence across the value chain, from manufacturing of finished dosage forms to active pharmaceutical ingredients, animal healthcare products, and wellness products. ? In Q1FY24, the company’s consolidated revenue rose a significant 29.6% YoY to Rs. 5,140cr, primarily propelled by the US formulations business, which surged 57.4% YoY. ? EBITDA also rose a sharp 80.7% YoY, and EBITDA margin expanded 830bps YoY to an all-time high of 29.3% due to lower commodity prices. ? New product launches, sustained growth in the US market, and benefits from investments in research and development (R&D) should continue to support the company’s earnings performance. ? Hence, we upgrade to BUY rating on the stock, with a revised target price of Rs.750 based on 24x FY25E adjusted earnings per share.

US performance fuels revenue growth

In Q1FY24, the company’s consolidated revenue rose 29.6% YoY to Rs. 5,140cr, primarily driven by robust performance in the US as well as other export markets. US formulations revenue increased 57.4% YoY to Rs. 24,451cr, supported by new product launches and volume expansion of the existing portfolio. The India formulations business posted growth of 9.1% YoY. The company maintained its leading position in the nephrology segment and saw rapid growth in the oncology space as well. Revenue from the consumer wellness business, though, grew a tepid 0.3% YoY; while unseasonal rains impacted the sales of Glucon-D, rest of the portfolio saw double-digit growth. Meanwhile, EBITDA reached Rs. 1,505cr, exhibiting a significant 80.7% YoY rise, and EBITDA margin expanded to 29.3%, owing to decrease in commodity prices. As a result, adjusted profit after tax surged 111.3% YoY to Rs. 1,101cr.

Innovation pipeline highlights

Zydus Lifesciences spent Rs. 323.9cr on R&D, which was equivalent to 6.3% of revenue. The company opened a new facility for manufacturing measles and rubella drug substance. It also commenced clinical testing for a hepatitis E vaccine. Clinical trials for two monoclonal antibodies are progressing as well, with patient recruitment for one of the molecules successfully concluded in the quarter.

Key concall highlights

* In Q1FY24, the company submitted four abbreviated new drug applications (ANDAs) and received approvals for 20 ANDAs, which included three tentative approvals.

* For FY24, R&D expenses are projected to constitute 8% of revenue.

* For FY24, the company anticipates EBITDA margin to expand 150-200bps (previously projected at 50-100bps).

Valuation

Strong performance of the US operations and R&D investments have facilitated the company to achieve superior revenue growth. New product launches, healthy growth in the US as well as domestic markets, and upcoming pipeline offerings for the next three years are expected to contribute to continued earnings growth in the long term. We, therefore, upgrade BUY rating on the stock, with a target price of Rs. 750 based on 24x FY25E adjusted EPS.

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