Shilpa Medicare - Weak performance; warning letter is an overhang - ICICI Securities

Shilpa Medicare (Shilpa) reported Q3FY21 results below our estimates due to lower formulations revenue on account of remediation activities at manufacturing unit. Revenue declined 19.3% YoY to Rs1.9bn (I-Sec: Rs2.7bn), EBITDA margin dropped 2010bps YoY to 11.0% (I-Sec: 24.8%) on high base & lower revenue and adj. PAT was down 86.1% to Rs77mn. Formulations revenue was down 58.2% QoQ to Rs343mn as there was temporary shutdown of manufacturing. The company is implementing the remedial measures post warning letter and has engaged a third party consultant for the same. 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. which would drive long term value. Maintain HOLD.

- Weak formulations segment impacted the growth: Revenue declined 19.3% YoY to Rs1.9bn during the quarter. This was primarily on account of 58.2% QoQ drop in formulations sales to Rs343mn vs estimated Rs682mn due to temporary plant shut down given ongoing remedial activities to resolve warning letter. We believe warning letter would remain an overhang in near to mid-term for formulations business as new approvals would get delayed. However, the company expects additional launches in EU market, which would help in improving revenue to some extent. API business grew 7.1% YoY but dropped 22.6% QoQ. The proportion of low margin CRAMS business is consistently reducing.

- Margin impacted by negative operating leverage: Gross margin declined 630bps YoY to 66.8%, though it improved 400bps QoQ. The gross margin has been volatile for the past few quarters with constantly changing revenue mix. Lower revenue has resulted in negative operating leverage which coupled with increased personnel costs resulted in 2010/1360bps YoY/QoQ drop in EBITDA margin. We expect the margin to revert to 23-24% level once formulations supplies revert to normal in the coming quarters.

- Outlook: Considering the recent warning letter at formulations facility and reducing CRAMS business, the revenue and earnings growth would be limited to 7.5% and 5.4% respectively over FY20-FY23E. We assume warning letter would be resolved over the next 12-18 months with growth improving thereafter (FY23E onwards). 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 5-8%/11-14% to factor in weak Q3FY21, approval delays due to warning letter and increased personnel costs. We maintain HOLD with a revised target of Rs448/share based on 20xFY23E (earlier: Rs472 based on 20xSep'FY22E EPS). Key upside risks: early resolution of warning letter and high value launches in formulations. Key downside risks: delay in new launches, regulatory hurdles and forex volatility.

Shares of SHILPA MEDICARE LTD. was last trading in BSE at Rs.423.75 as compared to the previous close of Rs. 429.65. The total number of shares traded during the day was 23554 in over 844 trades.

The stock hit an intraday high of Rs. 426.7 and intraday low of 410. The net turnover during the day was Rs. 9870124.

Source : Equity Bulls

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