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Steady outperformance in the Branded Generics segment

US business at a trough; expect a gradual recovery from here on

* TRP’s 4QFY21 result was marginally below our estimates at an operational level, led by a sharp YoY decline in US and CRAMS sales. It continues to build its product portfolio and enhance marketing efforts to outperform in Brazil, Germany, and the Branded Generics segment in Domestic Formulation (DF). It is also working on alternate site filings to reduce the regulatory risk in the US Generics business.

* We have maintained our FY22E/FY23E EPS estimate and continue to value TRP at 25x 12-month forward earnings to arrive at a TP of INR2,530. Gradual revival in demand for Branded Generics, with the lowering of COVID-19 caseloads; increasing vaccination pace in focus geographies of India, Brazil, and Germany; and subsequent promotional efforts would enable the company to deliver better growth in these markets going forward. The ANDA pipeline remains healthy for the US market. However, product approval largely hinges on the resolution of USFDA issues. We maintain our Neutral rating as current valuation adequately factors in improving outlook in DF/Germany/Brazil .

Product mix/controlled cost drive earnings in 4QFY21

* Revenue remained flat YoY at INR19.4b (est. INR20.4b) in 4QFY21. The 24%/10% YoY growth in Germany/DF (14%/48% of sales) was offset by a 30%/10% decline in US/Brazil (14%/10% of sales) in 4QFY21. Even RoW/Contract Manufacturing sales fell 4%/10% YoY (10%/5% of sales).

* Gross margin expanded 150bp YoY to 74.4% due to change in the product mix. EBITDA margin expanded at a higher rate (190bp YoY) to 30% (est. 29.9%). EBITDA margin expansion was driven by lower other expense (-70bp YoY as a percentage of sales), partially offset by higher employee cost.

* EBITDA grew 6% YoY to INR5.8b (est. INR6.1b).

* PAT grew at a higher rate (38% YoY) to INR3.2b (est: INR2.9b), due to better EBITDA margin and higher other income, partially offset by a higher tax rate in 4QFY21.

* Sales remained almost flat YoY at INR80b in FY21, while EBITDA/PAT grew 15%/34% to INR25b/INR12.7b.

Highlights from the management commentary

* While the US business declined 30% YoY in 4QFY21 due to lack of approvals and base business price erosion, TRP has taken measures like: a) transferring products to alternate sites, b) re-start of commercialization from Levittown facility from Jun’21, and c) re-launch of Sartans to mitigate the decline in US sales over the near to medium term.

* TRP awaits outcome of the district court on Para IV litigation for Dapsone.

* It launched three products in the DF market during 4QFY21. About 6-7% of growth is expected to be driven by better pricing.

* MR strength/monthly productivity stands at 3,600/INR0.85m.

* R&D for FY22 to be 6-6.5% of sales.

Valuation and view

* We continue to value TRP at 25x 12-month forward earnings and arrive at price target of INR2,530.

* We expect 14% earnings CAGR, led by 11%/17%/8%/11% CAGR in DF/US/Brazil/Germany sales, partially impacted by 70bp margin contraction, with normalization in opex related to its sales force in the DF segment.

* The current valuation captures upside in earnings over next two years adequately. Hence, we maintain our Neutral rating on the stock

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