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Sees healthy growth in the US and India, excluding COVID-related drugs

Downgrade the stock to Neutral

*  ZYDUSLIF delivered an operationally in line performance in 1QFY23. It continues to deliver a robust showing in Domestic Formulations (DF), excluding COVID-related drugs, and US Generics on superior execution, launches, and market share gains in existing products.

*  We raise our FY23/FY24 EPS estimate by 5%/2%, factoring in: a) a delay in competition in g-Asacol HD, b) increased distribution in the Consumer Wellness segment, and c) improving growth prospects in emerging markets.

*  Considering its muted earnings growth outlook (2% earnings CAGR over FY22-24) and moderate return ratios over the next two years, we reduce our 12M forward earnings multiple to 17x (from 19x earlier) and arrive at our TP of INR380. We downgrade the stock to Neutral on limited upside from current levels.

Increased RM and employee cost drag profitability YoY as well as QoQ

* Sales were steady YoY at INR40.7b (est. INR38.9b) as healthy growth in Consumer Health/EM/US was offset by a decline in DF/API sales in 1QFY23.

* LatAm and EM sales grew 14% YoY to INR3.2b (8% of sales). US sales grew 7.4% YoY to INR15.6b (40% of sales).

* Sales from India (46% of sales), comprising the DF and Consumer Wellness business, fell 6.5% YoY to INR18b. Within India sales, Branded Formulations fell 17% YoY to INR11.3b, while the Consumer Wellness segment grew 18% to INR6.9b.

* API sales declined by 10% YoY to INR1.2b (3% of sales)..

* Gross margin contracted by 320bp YoY to 62.9% on account of an inferior product mix.

* EBITDA margin contracted by 380bp to 20.5%. As a percentage of sales, higher staff expenses (up 110bp YoY) were partially offset by lower R&D costs (down 40bp) and other expenses (down 10bp).

*  As a result, EBITDA declined by 14% YoY to INR8.3b (est. INR8.1b).

* Adjusted PAT before discontinued operations fell 11% YoY to INR5.3b (est. INR4.9b) due to higher other income and a lower tax rate

Highlights from the management commentary

* The management is targeting an EBITDA margin of over 20% in FY23.

* It will file 30-35 ANDAs and launch 30 ANDAs in the US market in FY23.

* The management expects US sales to be on an uptrend, despite a price erosion, led by introductions and market share gains in existing products.

* R&D spends are expected to remain at 8% over the medium term.

* Its Specialty portfolio is expected to gradually gain scale starting with ‘Nulibry’.

* Once the regulatory compliance of the Moraiya facility is met, four out of five product approvals are expected in the Transdermal segment.

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