Zydus Lifesciences Q3FY23 results

Zydus Lifesciences’ (Zydus) reported Q3FY23 performance exceeded our estimates on all fronts. Revenues grew 19.4% YoY to Rs 43.6bn (I-Sec: Rs 40.7bn) driven by India and US markets. US sales were up 9.8% QoQ to US$235mn led by volume expansion in the base portfolio, seasonality and new product launches. Revlimid sales were similar to Q2 levels. India business reported healthy growth of 14.2% YoY driven by improved market share in key therapies. EBITDA margin expanded by 130bps YoY (+200bps QoQ) to 21.9%. Adjusted PAT was up 24.5% YoY (+3.6% QoQ) to Rs 6.3bn. Successful launch of Revlimid, clearance of Moraiya plant and attractive transdermal opportunities should support near-term growth. At 17.9x FY25E EPS, the stock trades at reasonable valuations in our view, hence we upgrade it to ADD (from Hold) with a revised target price of Rs 482/share (earlier: Rs 448).

Business review: India revenues grew 14.2% YoY on a reported basis, but were up 16% (ex-Covid portfolio) mainly driven by market share gains in key therapies. US sales rose 9.8% QoQ to US$235mn led by volume expansion in the base portfolio and seasonality. Clearance of Moraiya plant paves the way for approval and launches of transdermal products as well as injectables and other high-value products providing impetus to near-term growth, in our view. Consumer wellness sales grew 7.8% YoY. API sales were up 14% YoY. Gross margin expanded by 170bps YoY (+130bps QoQ) to 63.7% due to favourable product mix. Subsequently, EBITDA margin was up 130bps YoY (+200bps QoQ) to 21.9%. We expect margins to remain stable at ~21% over FY23E-FY25E.

Key concall highlights: 1) US: i) Revlimid is expected to contribute meaningfully in Q4FY23; ii) Two or three transdermal products are expected to be launched from the Moraiya plant in FY24 and are likely to be meaningful opportunities iii) For Asacol HD, the company does not see any competition yet in Q4FY23. 2) Consumer wellness: Price increases have been taken to counter inflationary pressures (the benefit will be seen in Q4FY23). 3) Guidance: i) R&D spend to remain at 8-9% of sales in the near term. ii) Expect EBITDA margins at ~21% in FY23 and witness further improvement from these levels in FY24.

Outlook: We expect revenue/EBITDA/PAT CAGRs of 8.4%/4.7%/2% over FY22- FY25E on a high base and elevated costs, which would restrict margins. Company has reduced its debt through divestment of its animal health business and will further strengthen the balance sheet with ~Rs 69bn of FCF generation over FY23E-FY25E.

Valuations and risks: We increase our revenue estimates (including Revlimid) by ~5- 6% and earnings estimates by ~9-15% over FY24E-FY25E to factor-in the potential transdermal launches and improvement in product mix. At the current price, we believe the stock trades at a reasonable valuation, hence we upgrade it to ADD (from Hold) with a revised target price of Rs482/share based on 20x Sep’24E EPS (earlier: Rs 448/share). Key downside risks: Competition in the US and regulatory hurdles.

For full Q3FY23 results click. ICICI Securities