Neutral Zydus LifeSciences Ltd For Target Rs.1,000 by Motilal Oswal Financial Services Ltd
US, emerging markets drive earnings
Confident to deliver high-single-digit YoY growth in US sales in FY26
* Zyduslife Sciences (ZYDUSLIF) delivered a slight miss on operational performance for 3QFY25. While sales were largely in line with expectations, lower sales of higher-margin products led to lower-than-expected profitability for the quarter. Healthy growth momentum in US sales and superior performance in the consumer segment amid muted industry-level growth were offset partly by moderate growth in the domestic formulation (DF) segment. ZYDUSLIF has enhanced its offerings in the consumer wellness segment by foraying into the consumer snacking space.
* We largely maintain our estimates for FY25/FY26/FY27. We value ZYDUSLIF at 22x 12M forward earnings to arrive at a TP of INR1,000.
* ZYDUSLIF is implementing efforts toward: a) building an innovative pipeline in NCE, biotech, 505b2 space; b) enhancing its generics pipeline for growth beyond g-Revlimid; c) increasing its presence in chronic therapy in DF business; and d) recovery in consumer wellness segment. However, we believe that the current valuation provides limited upside, hence we maintain Neutral on the stock.
Product mix benefit more than offset by higher R&D spend on YoY basis
* Sales grew 17% YoY to INR52.7b (our est. INR53.5b). US sales grew 30.8% YoY (+29% YoY in CC terms) to INR24.1b (USD285m; 47% of sales). India sales (38% of sales), comprising of DF and consumer businesses, grew 6.7% YoY to INR19.5b. Within DF, branded formulations grew 5% YoY to INR15b. Consumer wellness grew by 12.9% YoY to INR4.5b. EM/EU sales grew 15.5% YoY to INR5.7b (11% of sales). API sales rose 19% YoY to INR1.7b (3% of sales).
* Gross margin expanded 250bp YoY to 69.9%, due to a better product mix.
* Adj. for one-time operational expenses, EBITDA margin expanded 60bp YoY to 24.7% (our est. 26.1%), led by higher R&D (up 260bp YoY as % of sales) and other expenses (up 30bp as % of sales), offset by lower employee expenses (down 90bp as % of sales).
* EBITDA grew 20.2% YoY to INR13b (our est. INR14b).
* Adjusting for forex gain, PAT grew 26.3% YoY to INR9.5b (our est.: INR9.1b).
* In 9MFY25, revenue/EBITDA/PAT grew 19.3%/31.2%/25.1% YoY to INR167b/ INR48b/INR32.7b.
Highlights from the management commentary
* ZYDUSLIF aims to maintain momentum in g-Revlimid sales in FY26. It expects high-single-digit growth in US business over the next 12-15 months.
* A one-time cost related to legal/professional expenses (for acquisition), GST loss on account of inventory destruction, and other one-time expenses stood at INR950m for the quarter.
* GM was lower due to the product mix, lower off-take of g-Revlimid, and competition in g-Asacol.
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