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In line 2QFY23; focussed efforts towards Branded Generics

Work is in progress to resolve the regulatory issues at its Indrad facility

* TRP delivered an in line 2QFY23 performance. It continued to outperform in the Branded Generics market of Domestic Formulations (DF) and in Brazil. However, lack of approvals in the US and a subdued German business led to flat YoY earnings in 2QFY23.

* We have reduced our FY23/FY24 EPS estimate by 6%/5% to factor in: a) increased competition in certain products in Brazil, b) higher price erosion in the US base business, c) and higher promotional expenses in the Branded Generics segment. We continue to value TRP at 26x 12-month forward earnings to arrive at our TP of INR1,500.

* The outlook is expected to be encouraging for TRP (estimating 22% earnings CAGR over FY22-24), led by better-than-industry growth in DF and Brazil. The successful regulatory outcome remains key to a business revival in the US. We maintain our Neutral stance on the stock as current valuations adequately factors in an earnings upside over the next two years.

Higher OPEX drags profitability on a YoY basis

Revenue grew 7% YoY to INR23b (in line) in 2QFY23. Growth in the DF segment and Brazil was minorly offset by a muted showing in Germany.

* Revenue from the Brazil business grew 19% YoY to INR1.8b (est. INR2.3b).

* Revenue from the DF segment grew 13% YoY to INR12.2b (est. INR12.5b).

* Revenue from the US Generics business grew 3% YoY to INR2.9b (est. INR2.6b).

* Sales from Germany fell 12% YoY to INR2.2b (est. INR2.1b). ? Gross margin was stable YoY at 72%.

* R&D expenditure stood at INR1.2b (5.7% of sales).

* EBITDA margin fell 110bp YoY to 29.6% (est. 29.4%) due to higher other expenses (up 210bp YoY as a percentage of sales). However, the same was offset by lower employee costs.

* EBITDA grew marginally by 3% YoY to INR6.8b (est. INR6.8b).

* PAT fell 1.3% YoY to INR3.1b (est. INR3.5b).

* In 1HFY23, revenue grew 8% YoY to INR46b, but EBITDA/PAT remained marginally flat YoY at INR13.5b/INR6.4b.

Highlights from the management commentary

* TRP aims to outperform the India Pharma market (IPM) by 300-400bp YoY.

* Branded Generics remain the key growth driver in India and Brazil. ? It has 12 brands with sales in excess of INR1b and 17 brands in the top 500 brands in the IPM.

* Launches, field force expansion, and market share gains in its existing products will drive the outperformance in the Brazil market.

* Higher than expected competition in the Rivaroxoban brand affected growth in the Brazil segment to some extent.

* Its German business is expected to grow at mid-to-high single-digits, led by new tender wins. Tender wins in coming quarters is critical for growth in the German business.

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