Reduce Shilpa Medicare Ltd For Target Rs.391 - ICICI Securities
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Shilpa Medicare (Shilpa) held an analyst meet to discuss the company’s financial performance.
Highlights:
* performance. Highlights: ? Gross margins declined in Q1FY23 due to pricing pressures in both API and formulation segments. Company is proactively working on process changes, backward integration of intermediates and increasing scale of operations to improve cost efficiencies and enhance margin profile.
* In the API business, company intends to continue its focus on oncology molecules while reducing its dependence on niche non-onco molecules.
* Peptides: Shilpa has set up a dedicated block (including R&D and production blocks). It intends to complete 6 molecules (2 in FY23 and 4 in FY24) for the exhibit batches.
* Company is working on specialised polymers and believes there is enough opportunity to grow in the segment.
* Recombinant Albumin: Management expects phase-1 studies to start by CY22-end and complete it in ~9 months. Shilpa has been able to stabilise the product for ~1kL. The molecule will start with the excipient grade market, which has small potential, and then move towards formulations.
* The slump sale of the API business has concluded and it has been housed in a separate subsidiary. Shilpa intends to give some time for the business to stabilise before looking at an IPO.
* Shilpa has largely completed the remediation of Jadcherla formulations unit. Third-party audits of the plant have also concluded without any data integrity issues. Company is constantly in touch with the USFDA with regular updates.
* Adalimumab: i) On approval, Shilpa is expected to become the first domestic company to launch high-concentration Adalimumab. ii) Given the studies were conducted in EU, the company intends to pursue launches in RoW market. iii) Domestic market size for the molecule is ~Rs.1.5bn. iv) Certain expenses have been capitalised, which will impact P&L, but they are not significant
* Capex: Rs4bn was earmarked for the Albumin project, of which ~Rs1.2bn has been utilised. Apart from maintenance, there is no major capex for the formulations plant. Capex for the API business will depend on capacities and the management expects expense of ~Rs400mn-500mn. Company does not plan more investments into biologics.
* Onco and other API segments witnessed one-offs during Q1FY23 on account of Ind-AS requirements and trading revenues respectively.
Valuations and risks: We believe performance would remain steady going forward, with the USFDA resolution remaining key to faster growth. Maintain REDUCE with a target price of Rs346/share based on 24x FY24E earnings. Key upside risks: Early resolution of the import alert, high-value launches in formulations, and quick success in biosimilars.
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