Eris Lifesciences: Base business growth, Margin triggers to drive rerating

3 Apr 2023 , 10:12 AM

Recommendation: Buy

Target Price: Rs 730

 

With visible margin triggers for the business in FY24 driven by sales ramp-up expected in recent launches, PCPM improvement for Oaknet, rep cross leverage between Oaknet & acquired derma portfolios, and breakeven expected in the Insulin business, analysts at IIFL Securities have increased their EBITDA margin estimates for FY24/25 by 200/100bps, thereby leading to 10/4% EBITDA upgrades. While low growth on a reported basis has been a key concern, growth momentum is set to pick up with new launches expected to drive organic double-digit growth, which along with margin expansion can lead to 22% EBITDA CAGR over FY23-25. Improving growth and margin profile are critical for rerating, given Eris’ EV/EBITDA valuation at 9x FY25 is depressed versus 12-15x for other domestic peers.

New launches to help drive organic double-digit growth

Eris’ organic India business, adjusted for Zayo sales loss and Zac-D sales return, has grown 14% in 9MFY23 versus reported growth of 8%. While low growth has been a key concern, growth momentum is set to pick up with Zayo re-launched in Q4FY23 & upcoming launches of Linagliptin/FCM injection in H2CY23. Execution in new launches in DPP4/SGLT2 has been robust, with this segment accounting for 40% of Eris’ Diabetes sales now versus 20% in CY19. Analysts at IIFL Securities expect incremental sales from Zayo/Glargine and upcoming launches to drive 11-12% organic growth for Eris over FY23-25.

Execution in acquired portfolio ahead of expectations

Eris invested Rs12.7 billion in FY23 for acquisitions of Derma portfolios of Oaknet, Glenmark and Dr Reddy’s. While execution in Oaknet has been tracking one year ahead of expectations (27% EBITDA margins in Q3 versus 10% pre-acquisition), management is targeting consistent 15% growth for the Derma portfolio by focusing on ramping-up acquired brands’ sales through its 450-rep Derma team. Acquired portfolio revenue is expected at Rs4 billion in FY24, with EBITDA margins of 36-38%, thereby translating into ~9x FY24 EV/EBITDA.

EBITDA growth of 29% in FY24 will be faster than topline growth of 20%

Eris’ EBITDA margins contracted from 36% in FY22 to 33% in FY23 owing to investments done for new launches, Insulin business and acquisitions. However, with Oaknet’s PCPM having already expanded from Rs2.5 to Rs5.0 lakhs pm, acquired portfolio expected to generate 36-38% margins and break-even expected in Insulin business (versus 120bps margin drag in FY23), EBITDA margins are expected to expand to 35-36% in FY24.

EPS downgraded by 8-9% for amortization and interest expense of recent acquisitions

Following the recent acquisitions of Derma brands from Glenmark and Dr. Reddy’s, Eris’ net debt stands at Rs8.5 billion. Although ND/EBITDA will be ~1.5x in FY23, Eris can repay the acquisition-related debt in 2-3 years given company’s annual FCF generation will be Rs5.5-6 billion over the next two years. Even if Eris pursues additional inorganic growth opportunities (to fill portfolio gaps in CNS and Women’s Health), management expects ND/EBITDA to remain <2x. With overall acquisition spend of Rs12.7 billion in FY23, analysts at IIFL Securities expect the company’s incremental amortization expense to be Rs550-600 million p.a. (assuming 20-year amortization period) and interest expense of Rs650-700 million in FY24. While analysts at IIFL Securities have upgraded their EBITDA estimates for FY24/25 by 10/4% resp. to factor-in acquisition-related revenue and better-than-expected margins, their EPS estimates are revised downwards by 8-9% on account of amortization and interest cost of recent acquisitions.