Shilpa Medicare - Steady performance, investing in new ventures - ICICI Securities

Shilpa Medicare (Shilpa) reported Q2FY21 results largely in line with our estimates. Revenue declined 3.8% YoY on a high base to Rs2.8bn (I-Sec: Rs2.7bn), however, adjusted for one-time licensing income in Q2FY20 the growth stood at 28.4%. EBITDA margin improved 110bps YoY to 24.6% (I-Sec: 24.8%) driven by controlled S,G&A expenses as gross margins dropped 540bps YoY. Both APIs and formulations performed well. The management's focus is clearly on building high value businesses as it focuses on strengthening the oncology pipeline for regulated markets and foray into biosimilars, transdermals, etc. Shilpa is continuously investing in biosimilars, transdermals and other new business segments. We believe any success in biosimilars or transdermals may provide meaningful upside. Maintain ADD.

- Strong growth in base revenue: Revenue declined 3.8% YoY to Rs2.8bn during the quarter. However, the base had a one-time licensing income of Rs726mn. Adjusting for it, revenue grew 28.4% YoY. This growth was driven by strong traction in both APIs and formulations, which grew 15.4% and 72.6% respectively. The proportion of low margin CRAMS business is consistently reducing. Formulation sales were on back of new product launches in EU markets. The company recently received warning letter at Jadcherla formulations facility, which would limit the formulations growth in US market in near term. However, the company expects additional launches in EU market, which would help in improving revenue to some extent.

- Margin surprised positively: Gross margin declined 580bps YoY to 62.8% however, S,G&A expenses were tightly controlled as it declined 950bps and 37.0% YoY in absolute terms. This supported EBITDA margin that rose 110bps YoY to 24.6%. We expect the improving margin trajectory to continue driven by rising proportion of formulations and API segments as well as continuous decline in the proportion of CRAMS business to total sales. We estimate EBITDA margin to improve 250bps over FY20-FY23E to 26.7%.

- Outlook: Considering the recent warning letter at formulations facility and reducing CRAMS business, the revenue and earnings growth would be limited to 9.5% each over FY20-FY23E. We assume warning letter would be resolved over the next 12-18 months with growth improving thereafter. The company is heavily investing in new business ventures such as biosimilars, dermatology, oral thin films, etc. and success in these businesses would provide upside to our estimates.

- Valuations and risks: We lower revenue/EPS estimates by 2-4%/9-12% to factor in the warning letter and higher depreciation & interest expense as planned capex has gone up. We lower target P/E(x) to 20x from 22x due to warning letter and muted growth in near term. Considering recent fall in stock price by ~20%, we maintain ADD with a revised target of Rs472/share based on 20xSep'22E (earlier: Rs580 based on 22xSep'FY22E EPS). Key downside risks: Delay in resolving warning letter, delay in new launches, ramp up in launched products and forex volatility.

Shares of SHILPA MEDICARE LTD. was last trading in BSE at Rs.413.75 as compared to the previous close of Rs. 448.2. The total number of shares traded during the day was 67045 in over 3829 trades.

The stock hit an intraday high of Rs. 446 and intraday low of 406.75. The net turnover during the day was Rs. 28728207.

Source : Equity Bulls

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