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India/US/EM drives earnings

Work in progress for innovative pipeline

* Zydus Life sciences (ZYDUSLIF) delivered better-than-expected performance for 3QFY24. ZYDUSLIF exhibited superior execution in the domestic formulation (DF) and emerging markets; however, this was partly offset by a subdued performance in the API segment for the quarter.

* We raise our earnings estimate by 6%/7% for FY24/FY25 to factor in a) the extended limited competition for g-Asacol, b) DF growth surpassing industry standards, and c) the development of a differentiated product pipeline in the US generics segment. We value ZYDUSLIF at 21x 12M forward earnings to arrive at a price target of INR820.

* ZYDUSLIF continues to build a robust product pipeline in innovative, branded generics as well as generics category. Further, the operational efficiency is expected to drive better-than-industry growth in the DF segment. However, we reiterate our Neutral stance on the stock, given the limited upside from the current levels.

Better product mix led to improved profitability YoY

* ZYDUSLIF sales grew 6% YoY to INR45b (our est. INR44b). EM/EU sales grew 31% YoY to INR4.9b (11% of sales). India sales (42% of sales) comprising of DF and consumer businesses grew 11% YoY to INR18b. Within India sales, branded formulations grew 16% YoY to INR14b. Consumer wellness declined 3.5% YoY to INR3.9b. US sales declined 4% YoY (+5% YoY in CC terms) to INR18b (USD221m; 43% of sales). API sales declined 24% YoY to INR1.4b (3% of sales).

* Gross margin expanded 290bp YoY to 67.4%, due to better product mix.

* EBITDA margin expanded 290bp YoY to 24% (our est. 23.5%) as lower ‘other expenses’ (down 200bp YoY) was offset by higher employee cost (up 200bp YoY as a percentage of sales).

* Consequently, EBITDA grew 20% YoY to INR10.8b (our est. INR10.4b).

* ZYDUSLIF registered a forex gain of INR206m for the quarter.

* Adjusting for the same, PAT grew 30% YoY to INR7.5b (our est.6.7b).

* In 9MFY24, Revenue/EBITDA/PAT grew 15%/52%/71% to INR140b/INR37b/INR26b.

Highlights from the management commentary

* ZYDUSLIF exhibited healthy growth in volume/new launches, driving superior performance in the DF segment. The company plans to add 700MRs to expand its portfolio and enhance its market reach.

* ZYDUS expects slower build-up for Sitagliptin (Zituvio) in the US market.

* ZYDUS launched 11 ANDAs, which includes its first 505b2 product and 2 transdermals.

* The integration of Ligmeds is on track.

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