Neutral Zydus LifeSciences Ltd. For Target Rs. 1,045 By Motilal Oswal Financial Services
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Niche products, superior execution boost earnings
Levers in place to improve business prospects over next 2-3 years
* Zydus Life (ZYDUS) delivered a better-than-expected 4QFY24 performance, driven by increased off-take in the US/EU/API segments. ZYDUS saw better growth than the industry in the domestic formulation (DF) market. It ended FY24 on a strong note with 13%/41%/65% YoY growth in revenue/EBITDA/PAT.
* We raise our earnings estimates by 12%/14% for FY25/FY26 to factor in a) niche launches/increased traction in commercialized limited competition products, b) increasing share of chronic therapies in the DF segment, and c) a gradual recovery in demand for consumer healthcare products. We value ZYDUS at 24x 12M forward earnings to arrive at a TP of INR1,045.
* ZYDUS is in good stead to maintain growth momentum in its key markets of US/DF. It continues to work on complex products, including peptides, transdermals and injectables for regulated markets, as well as innovation products for global markets. While the outlook is promising, the valuation factors in the earnings upside adequately. Maintain Neutral on the stock.
Product mix partly offset by low operating leverage on YoY basis in 4Q
* Sales grew 10.4% YoY to INR55.3b (our est. INR52.7b). EM/EU sales grew 12.9% YoY to INR5b (9% of sales). India sales (40% of sales), comprising DF and consumer businesses, grew 8% YoY to INR21.6b. Within India, branded formulations grew 7.1% YoY to INR13.8b. Consumer wellness grew by 9.6% YoY to INR7.8b. US sales grew 12% YoY (+10.5% YoY in CC terms) to INR25.2b (USD304m; 47% of sales). API sales grew 14.8% YoY to INR1.4b (3% of sales).
* Gross margin expanded 470bp YoY to 70.9%, due to a better product mix.
* EBITDA margin expanded by 320bp YoY to 29.4% (our est. 28.6%), led by higher employee costs/other expenses (+70bp/+90bp YoY).
* Consequently, EBITDA grew 23.7% YoY to INR16.3b (our est. INR15b).
* 4Q had exceptional items related to a forex gain of INR53m.
* Adjusting for the same, PAT grew 52% YoY to INR11.7b (our est. INR9.2b).
* During FY24, revenue/EBITDA/PAT grew 13.4%/41.8%/65% to INR195b/INR53b/INR38b.
Highlights from the management commentary
* Guided for high-teens YoY growth in revenue in FY25, assuming competition for g-Asacol.
* Indicated gross margin/EBITDA margin to sustain in FY25 as well.
* Intends to launch 35+ products in the US market in FY25.
* Guided for double-digit YoY growth in DF revenue in FY25.
* Expects R&D spending to be 7-8% of sales in FY25.
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