Shilpa Medicare - Weak Q4; import alert remains an overhang - ICICI Securities

Shilpa Medicare (Shilpa) reported Q4FY21 results below our estimates due to significant jump in operating costs, partly on account of USFDA related remedial measures. Revenue declined 5.4% YoY to Rs2.1bn (I-Sec: Rs2.1bn), EBITDA margin dropped 810bps YoY to 12.6% (I-Sec: 18.8%) and adj. PAT was down 77.4% to Rs78mn. Formulations revenue was up 41.7% QoQ to Rs486mn with incremental sales from EU. The company is implementing the remedial measures post import alert at Jadcherla formualtions unit and has incurred additional expenses of Rs52.9mn on the same in Q4FY21. We expect these expenses to continue in near future. We believe performance would remain weak in near-term until USFDA resolution, though contract manufacturing of Sputnik V vaccines will provide some upside. Maintain SELL.

- Sales remain weak: Revenue declined 5.4% YoY to Rs2.1bn during the quarter. This was primarily on account of decline in API sales and flattish formulations sales due to import alert. We believe import alert 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 declined 4.4% YoY. The proportion of low margin CRAMS business will continue to reduce. The company has signed an another CDMO contract which would start contributing to revenue from Q2FY22.

- Cost base increases significantly: EBITDA margin was down 810bps due to material rise in operating costs despite revenue decline. However, gross margin was healthy. 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/SG&A costs resulted in sharp drop in EBITDA margin. We expect the margin to revert to ~21-22% level once revenue base increases in coming quarters.

- Outlook: Considering the recent import alert at formulations facility and reducing CRAMS business, the revenue growth would be limited to 8.9% CAGR over FY21-FY23E. We assume import alert will be resolved over the next 24-30 months with growth improving thereafter (FY24E onwards). The company has recently signed manufacturing agreement with Dr. Reddy's Lab for 100mn doses annually for three years which would provide near term upside. We value this opportunity at Rs46/share based on three years supplies.

- Valuations and risks: Raise revenue estimates by 8-9% over FY22E-FY23E considering additional CDMO contract and incremental sales to EU while cut EPS estimates to factor in higher cost base and depreciation. Maintain SELL on the stock with a revised target price of Rs387/share based on 20xFY23E earnings and Rs46/share for vaccine manufacturing (earlier: Rs336/share). Key upside risks: early resolution of import alert, high value launches in formulations and early success in biosimilars.

Shares of SHILPA MEDICARE LTD. was last trading in BSE at Rs.494.45 as compared to the previous close of Rs. 517.05. The total number of shares traded during the day was 65194 in over 2801 trades.

The stock hit an intraday high of Rs. 509.75 and intraday low of 490.8. The net turnover during the day was Rs. 32510938.

Source : Equity Bulls

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