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US quarterly revenue at historical high

Work in progress to enhance product pipeline

* Zydus Life Sciences (ZYDUSLIF) beat our earnings estimates in 1QFY24, aided by strong traction in exports to the US and EU, and healthy YoY growth in the domestic formulation (DF) and API segments.

* We raise our FY24/FY25 earnings estimates by 8%/4% to factor in niche product launches in the US generics segment, seasonal impact on consumer healthcare brands, and DF segment growth in line with market growth. We value ZYDUSLIF at 20x 12M forward earnings to arrive at a TP of INR610.

* The strong pace of approvals for limited-competition products offers promising growth prospects in the US generics business. Discovery-based products, biosimilars and other branded generics are expected to improve the DF segment’s outlook. However, we maintain our Neutral rating on the stock as the current valuation adequately captures earnings upside.

Product mix/operating leverage drive margin YoY/QoQ

* Sales grew 29.6% YoY to INR51.4b (est. INR50.4b). US sales rose 57.4% YoY (+47.5% YoY in CC terms) to INR24.5b (USD298m; 48% of sales). India sales (37% of sales), including DF and consumer businesses, grew 5.7% YoY to INR19.2b. Within India sales, branded formulations grew 9.1% YoY to INR12.3b. Consumer wellness was flat YoY at INR7b. API sales rose 13.5% YoY to INR1.4b (3% of sales). LATAM/EM sales increased by 34.7% YoY to INR4.9b (9% of sales).

* Gross margin expanded 550bp YoY to 67.4%, due to a better product mix.

* EBITDA margin expanded 1150bp YoY to 29.8% (est. 25.9%), led by better GMs and lower employee/other expenses/lower R&D expenses (-300bp/- 220bp/-90 YoY as % of sales).

* Consequently, EBITDA almost doubled YoY to INR15.3b (est. INR13.1b).

* ZYDUSLIF had exceptional items related to discontinued operations of Zydus Wellness Products (INR142m) and a forex loss of INR271m in 1QFY24.

* Adjusting for exceptional items, PAT grew 1.5x YoY to INR11.2b (est. INR8.8b)

Highlights from the management commentary

* ZYDUSLIFE guides for US business growth in the high single digits to low double digits in FY24.

* It expects the DF segment to grow in line with market growth.

* The company guides for EBIDTA margin expansion of 150-200bp in FY24.

* It expects the g-Vascepa launch in 3QFY24. REMS products would also be launched in 3QFY24.

* Two transdermal launches in the US are expected at FY24 end.

* R&D would be 8% of sales in FY24.

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