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YoY growth takes a breather in 1Q

Biologics CDMO emerges as growth lever; valuation caps upside

• Zydus Lifesciences (ZYDUSLIF) posted a 5%/4%/15% beat on revenue/EBITDA/PAT estimates for 1QFY26. The outperformance was driven by higher-than-expected revenues from the US and emerging markets, along with higher other income. That said, 1QFY26 marks the first YoY decline in EBITDA/PAT in the past 8-10 quarters.
• Despite competition in products like g-Revlimid/Asacol, ZYDUSLIF reported QoQ increase/stable YoY US sales of USD372m. This has been largely led by healthy traction in the base portfolio, new launches, and steady business from g-Myrbetriq.
• ZYDUSLIF sustained its momentum of outpacing the domestic formulation (DF) segment through increased focus on chronic therapies. The cardiology therapy reported a remarkable 22.5% YoY growth in 1QFY26.
• ZYDUSLIF has forayed into the global biologics CDMO business through Agenus’ US-based manufacturing facilities. The exclusive manufacturing license for certain products and the addition of in-house developed products serve as additional growth levers for ZYDULIF.
• We raise our earnings estimates by 3.5%/2% for FY26/FY27, factoring in: a) incremental US sales despite higher competition and b) superior execution in other international markets, partly offset by adverse seasonality in the consumer health business. We value ZYDUSLIF at 23x 12M forward earnings to arrive at our TP of INR1,000.
• Following the earnings beat in 1QFY26, we have upgraded our earnings estimates for FY26/FY27. However, given the risks to the US portfolio from increasing competition/ongoing litigation, we build an overall 5% decline in EBITDA/PAT over FY25-27. Additionally, the current valuation offers limited upside. Considering these factors, we reiterate our Neutral stance on the stock. Revenue growth offset by product mix/higher opex on YoY basis
• ZYDUSLIF’s sales grew 6% YoY to INR65.7b (our est. INR63b).
• India sales (36% of sales), which comprises the DF and consumer businesses, rose 6% YoY to INR23.7b. Within India sales, branded formulations grew 8% YoY to INR15.2b. Consumer wellness grew 2% YoY to INR8.5b.
• US sales grew 2.9% YoY (stable YoY in CC terms) to INR31b (USD372m; 48% of sales).
• International market sales grew 36.8% YoY to INR7.3b (10% of sales). API sales grew 11% YoY to INR1.6b (2% of sales).
• Gross margin contracted 170bp YoY to 72.8%, due to a better product mix.
• EBITDA margin contracted 310bp YoY at 30.9% (our est. 31.2%) due to contracted GM and higher opex (R&D/employee costs up 110bp YoY each as a % of sales).
• EBITDA declined 4% YoY to INR20.3b (our est. INR19.5b).
• ZYDUSLIF recorded a forex loss of INR570m.
• Adjusting for the same, PAT was stable YoY at INR14.2b (our est: INR12.7b).

Highlights from the management commentary

• ZYDUSLIF has maintained its FY26 guidance with single-digit growth despite Revlimid price pressure; it has planned for over 30 launches and injectable facility clearances.
• ZYDUS has maintained its guidance of single-digit YoY revenue growth in the US business for FY26, despite rising competition in g-Revlimid. The company’s confidence is supported by an uptick in the base business, scale-up of 505b2 products, and favorable offtake of mirabegron.
• Mirabegron’s prospects are subject to the outcome of a trial scheduled for Feb’26, though ZYDUSLIF continues to sell the product.
• ZYDUSLIF has guided for high-teens to mid-twenties YoY growth in international emerging markets for FY26.
• In the biologics segment, ZYDUSLIF has initiated plans to scale up the new manufacturing facility acquired from Agenus. Additionally, at the Sterling Biotech facility, the company is undertaking a large capex program to build capabilities for recombinant whey protein and whey isolate production, with commercialization expected to begin next year.

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