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Strong print

Poly Medicure’s (Polymed) Q2FY23 performance beats our estimates on all fronts. Revenue grew 23.0% YoY to Rs2.7bn (I-Sec: Rs2.6bn) led by strong demand across segments. EBITDA margin expanded 80bps YoY and 480bps QoQ to 23.5% which is expected to improve hereon. Adj. PAT was up 13.8% YoY to Rs435mn (ISec: Rs344mn). We like the company mainly due to its 1) strong presence in the fast-growing medical disposable segment, 2) industry tailwinds, 3) beneficiary of ‘China + One’ strategy, 4) leading market share in key categories, 5) entry into larger markets like the US, 6) expansion into margin-accretive segments, and 7) strong financials. However, the recent run up in the stock price (~32% in last 3 months) has made valuations fair, hence, we downgrade the stock to HOLD from Buy with a revised target price of Rs980/share (earlier: Rs849).

* Business review: Domestic business grew ~27% YoY in Q2FY23 led by robust volume growth. Exports also posted healthy growth of ~22% YoY led by strong demand across markets. We expect exports to grow 18.7% over FY22-FY25E on a low base driven by improving reach in the existing markets and growing contribution from US with new launches. Gross margin declined 120bps YoY (-140bps QoQ) to 61.4% due to high cost inventory which would reduce going ahead. EBITDA margin grew 80bps YoY (+480bps QoQ) on account of operating leverage.

* Key concall highlights: 1) FY23 guidance: >20% overall revenue growth, exports to clock ~Rs7bn by FY23. 2) US: i) In the process of completing BE studies and expects to send report by Nov’22 with first product launch by the end of Q4FY23; 3) capex: i) 2 plants in Faridabad (to commence operations in Q1 and Q2 of FY24) and one plant in Jaipur, ii) Rs1bn spent in H1FY23; on track to invest Rs1.75-2bn, iii) to invest Rs150mn in renal space for PLI; 4) Dialyser: installed 140 machines and intends to add another 60 with the target of 500 installations next year

* Outlook: We introduce FY25 estimates and expect revenue/EBITDA/PAT CAGR of 18.0%/23.3%/22.5% over FY22-FY25E, respectively. New launches and geographical expansion would drive strong growth in domestic and export markets. We expect EBITDA margin to increase by 320bps over FY22-FY25E with softening of cost inflation and improving product mix. RoE and RoCE would reach 16.5% and 15.1%, respectively, by FY24E.

* Valuation and risks: We largely maintain our estimates with marginal increase to account for faster growth in exports with better margins. We remain positive on the long-term outlook but the recent run up in the stock price (~32% in last 3 months) has made valuations fair, hence, we downgrade the stock to HOLD from Buy with a revised target price of Rs980/share based on 25xSep’24E EV/EBITDA (earlier: Rs849/share). Key upside risk: Market share gains in domestic market. Key downside risks: Intensified competition, disruption in distribution network.

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