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Higher opex to weigh on margins

Zydus Lifesciences (ZYDUSLIF) Q2 EBITDA was largely in line with our estimates aided by higher revenues across key markets. The company has managed transition well of gRevlimid sales decline with new niche launches. Further company is working on a robust pipeline of complex products, including injectables, 505(b)2, transdermals, NCE, biosimilars and vaccines, they are expected to materialize over the next 2–3 years. We expect US sales to growth at 10% CAGR over FY26-28E despite sales erosion in some of key products. Mgmt have guided for 2-3 high value launches over FY27E/28E, timely launch will be key to sustaining momentum in US sales. Our FY28/29E EPS stands cut by 4-8%. We maintain our ‘Accumulate’ rating with TP of INR 1,200, valuing at 24x Sept 2028E EPS.

Higher domestic & US revenues support growth YoY:

ZYDUSLIF showed revenue growth of 29% YoY to INR 79bn, 5% above our estimate. The YoY growth was aided by higher domestic formulation and US sales. Domestic formulation delivered growth of ~18% YoY. Consumer business grew by 76% YoY given comfort click business consolidation. US sales came in at USD 347mn up 6% QoQ. EM markets were up by 33% YoY to INR 10bn. API revenues was up by mere 1% YoY. Medtech business reported muted revenues of INR 2.2bn

In line EBITDA:

EBITDA, including other operating income, came in at INR 17.6bn; up 10% YoY, in line with our estimates. OPM stood at 22.2%, down 120bps QoQ. GMs were up 20bps YoY and 90bps QoQ to ~72%. R&D expenses came in higher at INR 6.6bn (8.5% of revenue), up 36% YoY. Other expenses ex R&D were up 51% YoY and 5% QoQ given new business consolidation and USD12mn front load expenses for Saro commercialization. Other operating income came in higher at INR 1.5bn. There was forex gain of INR 1.4bn. Tax rate higher at 27%. Reported PAT of INR 9.2bn. Adj for forex PAT declined YoY. EPS adj for forex at INR 8/share.

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