Shilpa Medicare Ltd. share price target

Shilpa Medicare’s (Shilpa) Q2FY23 performance was a big miss on profitability front.
Revenue declined 11.0% YoY to Rs2.6bn (I-Sec: Rs2.6bn) due to decline in sales in formulation segments. EBITDA margin at 4.9% (I-Sec: 12.0%) contracted 1,340bps YoY and 320bps QoQ.

Gross margins declined in Q1FY23 due to pricing pressures in both API and formulation
segments.

Shilpa Medicare’s (Shilpa) Q1FY23 performance was weak across parameters.

Shilpa Medicare Limited (SML') is a dominant player in Oncology (76% of total revenues). After establishing strong foothold in API segment, it leveraged its niche capabilities to forward integrate into formulations FY17 onwards. SML's strength lies in its R&D capabilities (~16% of sales) to move across value chain from APIs to formulations to Biologics, focusing on niche and complex molecules. Over last 5 years SML has been in a capex cycle (spent INR 1700crs+ on Capex and R&D) to augment its capabilities. At the same time earnings were impacted due to the Import Alert on the only USFDA plant. This led to a stretched balance sheet and an unsupportive P&L for SML over last 2 years. As per us, SML's earnings have now bottomed and should move north from here on the back of positive EBITDA contributions from Formulations and Biologics. Recombinant Albumin, large potential molecules and monetization of API business remain high probability optionality for SML. We thus value SML on 15x EV/EBITDA basis for their base business FY24E EBITDA and the valuations of key optionality as articulated in page 16 of the report. We thus arrive at a March-23 base...

7 February 2019 Revenue declined 7% YoY (+7% QoQ) momentum in US business, where sales grew 46% YoY to INR365m (21% of sales). This, however, was offset by the subdued performance of CRAMS business, where sales declined by 48% YoY to INR260m (15% of sales), particularly due to the exit from CRAMS JV. Captive consumption led to a 13% YoY decline in onco API sales to INR610m (35% of sales). Gross margin expanded by ~1,111bp YoY to 62%, led by the increased share of formulation sales. However, EBITDA margin expanded by only 40bp YoY to 15.1% due to increased operating cost (employee expenses up 558bp YoY and other expenses up 507bp YoY). Thus, absolute EBITDA declined by 4% margin shrank 804bp YoY due to increased RM cost. Adjusting for the same, PAT was up 20% YoY at INR5.3b (-4.3%/INR1.2b (unchanged)/INR739m (+2% YoY).

Also, SLPA has regulatory compliance in place with respect to its formulation and API facility. The drug has a market size of USD885m (IQVIA MAT Q2 2018) with six other generic approvals, of which two approvals came in the last six months. For FY18, US sales stood at ~INR1.4b (USD20m; 19% of total sales), which came in largely from only two products (Capecitabine and Azacitidine). Thus, on FY18 base business of USD19m, g- Gleevec would contribute meaningfully in the US generic segment. Currently, SLPA has four ANDA approvals (including g-Gleevec) and a healthy pipeline of 34 products pending for approval. We expect US sales to reach INR3.2b in FY20 (32% of sales) on the back of new launches and better traction in approved molecules. facility located at Raichur received EIR for inspection, which was carried out in Jan18. The formulations facility at Jadcherla received EIR in Mar18 for inspection carried out in Dec17.

14 November 2018 Shilpa Medicares (SLPA) revenue declined sales; down 38% YoY to INR310m) and Onco API (31% of sales; down 38% YoY to INR510m) segments. However, higher sales in US formulations (22% of sales; up 44% YoY to INR360m) and Non-Oncology API (22% of sales; up 14% YoY to INR363m) provided some comfort. expanded by 1,355bp YoY, led by increased sales of higher-margin products. margin contracting 470bp YoY to 23.1% (in-line) due to increased employee cost (27.3% of sales v/s 17.4% in 2QFY18) and other expenses (21.7% v/s 13.4% in 2QFY18). The increase in these cost components can be attributed to higher operating cost related to the formulation business. SLPA had extraordinary income of INR261m on account of sale of stake in JV. Adj. PAT EBITDA and PAT stood at INR3.6b (-3.2% YoY), INR923m (flat YoY) and INR554m (-2.

28 May 2018 Net sales grew 3.8% YoY to INR2.3b (est. of INR2.1b) in 4QFY18, led by increased formulation sales. Gross margin shrank 500bp YoY to 54% due to increased RM prices in the CRAMS business. EBITDA margin, too, contracted 480bp YoY to 20.3% (est. This, along with higher depreciation and lower other income, led to a PAT decline of 23.5% YoY to INR304m (est. Sales were flat at INR7.9b, largely due to the transfer of the CRAMS business to a joint venture.

Shilpa Medicare (SLPA) recently decided to end its joint venture (JV) with ICE S.P.A Italy (ICE) - a move that would help it garner proceeds of INR1.3b, as against its investment of INR800m toward the JV. Furthermore, the amount of annual business with ICE via CRAMS may be reduced by ~INR500m. The decision was premised on the increasing uncertainty over the profitability of the JV. Accordingly, for FY19/FY20, we reduce our (i) sales estimate by 5% to INR10b/INR12b and (ii) earnings estimate by 8.5% to INR2.1b/INR2.7b. Consequently, our price target is lowered to INR686 (25x 12M forward earnings). We, however, remain positive on SLPA and re-iterate our Buy rating, given the promising outlook for the US formulations business (31 ANDAs pending for approval)and minimal medium-term regulatory risk.

Shilpa Medicare Ltd. (SML), established in 1987 at Raichur, Karnataka is engaged in the production and exports of consistently high-quality Active Pharmaceutical Ingredients (API) Fine Chemicals, intermediates, herbal products and speciality chemical products using sophisticated technology, meticulously following international specifications with Mr. Omprakash Inani as Chairman and Mr. Vishnukant C. Bhutada as MD. Over the period of time, it has shifted its focus towards creating a niche in pharmaceutical manufacturing particularly in Oncology generics. It is one of the leaders in the Oncology market and offers a complete range of products in this segment spanning across APIs, formulations both in terms of R&D; and manufacturing capabilities along...

The receipt of establishment inspection report (EIR), with unchanged status - voluntary action initiated (VAI) - for the Jadcherla formulations facility from the USFDA is a positive. It minimizes regulatory risk over the medium term. SLPA's ANDA pipeline remains robust. We expect 16% CAGR in sales to INR12b and 35% CAGR in PAT to INR2.7b over FY17-20. Our price target of INR749 implies 53% upside. We re-iterate Buy

We have reduced our EPS estimates by 26%/11%/11% for FY18E/19E/20E to factor 1) increased RM prices in CRAMS and 2) deferment of US business due to inspection related hurdle and equipment related issue. Accordingly, we have revised our price target to INR749 (from INR797 earlier) by valuing at 25x 12m forward earnings.Though Q3FY18 results were weak, we remain positive as SLPA has robust ANDA pipeline for US market, which is the key growth driver, subject to approval. Maintain Buy on potential upside of 47% from current levels

We recently met Shilpa Medicare's (SLPA) management to get an update on its business segments. The company is progressing well on ANDA filings, with cumulative pending approvals of 26. With a low base in the US market, sales there are expected to ramp-up, led by its existing products and new approvals. We expect SLPA to deliver US revenue of INR4b in FY20, significantly higher than INR250m in FY17. The company is well positioned in the Europe market too, with marketing authorization in place and likely tie-ups with marketing agencies. In addition to injectables, SLPA has started R&D; in transdermal patches. We continue to like SLPA, as the key positives are in place to drive...

The Q4FY15 revenue declined by 0.4% YoY and grew at 7.9% QoQ. The company has maintained the revenue growth achieved in FY14 (at 54% YoY) at 7.4% YoY for FY15. The company's ascent in operating margins continues as it reported an EBITDA margin of 22.7% in Q4FY15, an increase of 87 bps QoQ and 147 bps YoY

Shilpa Medicare (SLPA) is a pharmaceutical company with operations in oncology API manufacturing and custom synthesis. The company has invested in creating dedicated facilities for custom synthesis, foraying into formulation sales and reaching out to USA through the base business of APIs.