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Lack of near term triggers

Our view

Management commentary remains positive around demand environment particularly for clients based out of US & Europe though the company refrained from changing revenue guidance. Albeit, overstocking on RM that need to be expensed to have a toll on gross margin which we now cut by 300bps vs our previous estimate of 75% ; coupled with Rs310mn in one‐time write down of export incentives, leads to a 24% cut to FY22 EPS.

However, FY23/24 estimates remain largely unchanged. We expect costs to expand in H2 yoy on back of recent senior executives hiring as well as increase in travel costs. With revenue surprises unlikely in H2 and rebound in gross margin being dependent on resolution of supply chain (we factor in a near normal RM scenario with H2 gross margin of ~74%), reckon there exists little triggers in the near term to further rerating.

While our preference for the franchise remains intact on back of medium term factors like start of Mangalore API, monetization of biologics capex (earlier than API), see little catalysts over next 6 months. Await a better entry point and retain SELL with largely unchanged TP of Rs520.  

Result Highlights

* Revenues up 17.4% YoY with growth broad‐based led by strong performance for newer services like protein degradation and peptide synthesis within discovery services. US and European markets started returning to normalcy.

* EBITDA margin at  ‐130bps YoY below our estimates of 31% due to ~300bps decline in gross margin to 72.5% (one of the lowest in last several quarters barring Q1 FY22 which had large Remdesivir contribution); lower GM attributed to increased stocking of RM due to supply chain disruption. Staff costs up 15% yoy and included senior hiring across teams.

* PAT before exceptional items was below estimates of Rs910mn. Exceptional include net reversal of Rs253mn in export incentives provisioned earlier which are now capped at Rs50mn. Reiterates mid‐teens growth for FY22.

Valuation

While our preference for the franchise remains intact on back of medium term factors like start of Mangalore API, monetization of biologics capex (earlier than API), see little catalysts over next 6 months. Await a better entry point and retain SELL with largely unchanged TP of Rs520, based on 28x FY24 EPS. 

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