Neutral Zydus LifeSciences Ltd for the Target Rs 1,125 by Motilal Oswal Financial Services Ltd
Steady quarter overshadowed by higher D&A, interest, tax DF outperformance, Saroglitazar review support pipeline; upside capped
* Zydus Lifesciences (ZYDUSLIF) delivered largely in-line revenue/EBITDA in 1QFY27. However, earnings came in lower than expected due to higher depreciation, interest outgo and tax rate for the quarter. 1Q performance was aided by robust growth in domestic formulation (DF), emerging markets and acquisitions.
* Notably, ZYDUSLIF has been outperforming the industry in DF for the past three years. It has outpaced IPM in key therapies like cardiology, diabetology, gynecology, dermatology and super specialty areas of oncology and nephrology.
* NA sales declined for the second consecutive quarter. The launch pace remained strong. However, increased competition in base products impacted NA segment performance for the quarter.
* ZYDUSLIF continues to implement efforts toward development and regulatory phases of its innovative product pipeline, with priority review granted to Saroglitazar magnesium NDA by USFDA.
* We largely maintain our revenue/EBITDA estimates for FY27/FY28. We cut our earnings estimates by 9%/5% for FY27/FY28, factoring in higher depreciation and interest outgo.
* We value ZYDUSLIF at 23x 12-month forward earnings to arrive at a TP of INR1,125. ZYDUSLIF continues to invest in
a) building its own differentiated product pipeline
b) adding new levers of growth partly through acquisitions
c) marketing to sustain industry-beating growth in DF.
* Having said this, earnings are expected to witness a moderate 5% CAGR over FY26-28, and valuation provides a limited upside. Hence, we maintain a Neutral stance on the stock.
Sales growth resilient; EBITDA margins contract YoY due to higher opex
* Sales grew 22% YoY to INR80.2b (our est. INR76.8b).
* Gross margin declined 70bp YoY to 72.1%.
* EBITDA margin contracted 750bp YoY at 23.4% (our est. 24.6%), due to higher opex (employee expenses/other expenses up 180bp/440bp YoY as % of sales) and R&D spend (up 60bp YoY as % of sales).
* EBITDA decreased 7.8% YoY to INR18.7b (our est. INR18.9b).
* Forex gain was INR569m and exceptional expense was INR182m.
* Adjusting for these expenses, PAT decreased 36% YoY to INR9.1b (our est.: INR10.3b).
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