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DF on a strong footing; making inroads in Trade Generics

US growth revival largely dependent on regulatory clearance

* TRP’s 1QFY22 performance was largely in line with our estimates. Growth momentum in the Domestic Formulation (DF) business was offset by a muted showing in the US business and a higher tax rate. It continues to work on alternate site filings to lower the impact of USFDA regulatory issues.

* We reduce our FY22E/FY23E EPS estimate by 7%/2% to factor in a delay in resolving USFDA compliance issues at its key sites and higher utilization of MAT credit, thereby increasing the effective tax rate. We value TRP at 25x 12-month forward earnings to arrive at our TP of INR2,800.

* The Branded Generics segment in DF/LatAm/Germany is improving, with an ease in COVID-19 cases. TRP’s plan to make inroads into the Trade Generics segment would further boost growth opportunities in the DF segment. Overall return ratios may be suppressed till there is a revival in US segment revenues. The current valuation adequately factors in an upside in the Branded Generics segment. We maintain our Neutral rating.

Earnings in line; pricing pressure in the US outweighs growth in the DF business

* Revenue grew 4% YoY to INR21.3b (est. INR20.8b) in 1QFY22. DF sales grew 18% YoY to INR11b (51% of sales). Brazil sales rose 9% YoY (14% in CC terms) to INR1.5b (7% of sales). Contract manufacturing sales grew 6% YoY to INR1.5b (7% of sales). Europe sales grew 6% YoY to INR2.6b (12% of sales).

* US sales declined by 26% YoY to INR2.7b (USD36m; 12% of sales).

* Gross margin contracted by 160bp YoY to 72.4% due to changes in the product mix.

* EBITDA margin contracted at a lower rate (110bp YoY) to 31.7% (est. 30.5%) due to a slightly better operating leverage. Employee expense/other opex fell 10bp/20bp YoY as a percentage of sales.

* R&D spend was INR1.3b and constituted 6% of sales.

* EBITDA was nearly flat YoY at IN6.8b (est. INR6.3b).

* PAT declined at a higher rate (2% YoY) to INR3.3b (est. INR3.2b) due to higher deferred tax expense of INR600m, related to MAT credit utilization.

Highlights from the management commentary

* TRP witnessed new product/price/volume growth of 14%/6%/4% YoY in the DF segment. It launched four new products and a few extensions in Nutritional products in the Indian market in 1QFY22. The next wave of new launches will be when patents expire next year.

* The Trade Generics (TGx) segment will focus mainly on Acute and some sub-Chronic products. TRP may look to shift some products to the Trade segment, where consumer involvement and self-medication is higher.

* TRP exhibited a higher single-digit pricing impact across the portfolio on an annualized basis.

Valuation and view

* We reduce our FY22E/FY23E EPS estimate by 7%/2% to factor in a delay in ANDA approvals due to regulatory issues at Indrad/Dahej and an increasing effective tax rate.

* We continue to value TRP at 25x 12-months forward earnings and roll our TP to INR2,800.

* We expect 13% earnings CAGR, led by an 11%/12%/8%/11% CAGR in DF/US/Brazil/Germany sales, and 80bp EBITDA margin expansion due to lower opex in DF after the sales force rationalization.

* We maintain our Neutral rating as the current valuation adequately factors an improving outlook in DF/Germany/Brazil.

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