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Concord Biotech's earnings came in slightly below our expectations. Q1, typically a seasonally weak quarter, led to a sequential decline in performance. Revenue stood at INR 2,158 mn, reflecting a 10.8% YoY increase but a 32.3% QoQ decline. The formulations business exhibited strong growth while the API business grew modestly. EBITDA grew by 12.6% YoY but decreased by 39.5% QoQ to INR 813 mn, with the margin slightly improving by 63bps YoY but falling by 444bps QoQ to 37.7%. Adjusted PAT came in at INR 596 mn, showing a 9.4% YoY growth but a 37.3% QoQ decline. The management remains optimistic about the growth prospectsfor both segments.

* API Business: The API businessreported modest growth of 4.5% YoY but declined by 35.5% QoQ to INR 1,711 mn. The company observed irregular procurement patterns from large customers, but management is optimistic . about recovering sales over the full year. The company has been expanding its portfolio into antibiotics and oncology, and it is expected that the contribution from these segments will increase, reducing reliance on immunosuppression compared to last year. The introduction of new products and an expanding market share from existing clients are anticipated to drive a strong ramp-up in the API business.

* Formulation Business: The formulations business demonstrated robust growth of 43.7% YoY but declined by 16.4% QoQ to INR 448 mn, reflecting deeper market penetration and greater acceptance of the company’s products. Once the injectable plant begins contributing significantly over the next two to three years, a slight improvement in formulation margins is expected. Regulatory approvals in emerging markets are anticipated to accelerate compared to the previous year. Future growth will be driven by the addition of new dosage forms, such as injectables, broadening the product portfolio, and expanding geographic reach.

* Margin Profile: The gross margin declined by 165bps YoY but improved by 547bps QoQ to 77.6%. EBITDA saw a 63bps improvement YoY but contracted by 444bps QoQ. Management expects EBITDA to grow at a much faster rate than the top line due to operational efficiencies. While the launch of the injectable facility may slow margin growth slightly, this will be partially offset by the operational efficiency of the Limbasi facility.

* Outlook & Valuation: We are optimistic about Concord Biotech because of the following: 1) top-line growth at a CAGR of 25% over the next 3-5 years driven by robust pipeline; 2) the API & Formulations segment, which is benefiting from new launches and the addition of injectables to its portfolio; 3) ready capacities and low utilization levels that present opportunities for operating leverage and margin expansion; and 4) ongoing exploration of opportunities in the CDMO segment, which will accelerate growth. We estimate FY23-26E Revenue/EBITDA/PAT CAGR of 21.5%/24.7%/27.0%. We value the stock at 36x FY26E EPS to arrive at a target price of Rs.1,691 and maintain the BUY rating on the stock.

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