PL Stock Report: Eris Lifesciences (ERIS IN) - Q1FY24 Result Update - Strong margin show; Focus on organic growth - BUY

Eris Lifesciences (ERIS IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs828 | TP: Rs910

Q1FY24 Result Update - Strong margin show; Focus on organic growth

Quick Pointers:

§ Successful completion of MJ’s Glargine and Liraglutide Phase -III clinical trials. Launch in Q4FY24

§ Scale up of new Derma block to help achieve better margins.

Eris Lifesciences (ERIS) Q1FY24 reported healthy EBITDA of Rs1.7bn (up 31.4% YoY) with sharp improvement in OPM at 36.4% (up 400bps YoY). We expect margins to sustain as revenue scales up from recent acquisitions which is currently operating at sub optimal profitability. The company has multiple growth levers such as broad based offerings in derma segment, opportunities in cardio metabolic market with patent expirations and benefits of operating leverage, as revenue scales up from these acquisitions. We maintain our ‘BUY’ rating with revised TP of Rs910, valuing 16x EV/EBITDA on FY25E.

§ Revenue grew by 17% YoY to Rs4.6bn in-line with our estimates aided by derma acquisitions. ERIS grew by 13.3% YoY vs IPM growth of 9.8% in 1Q as per AIOCD. Overall branded generic business grew by 21% aided by derma acquisitions. We believe company has booked 7-8% organic growth in Q1. During the quarter the seamless integration of Oaknet operations and gradual ramp up in the capacity utilization levels aided growth. The company witnessed Rs 90mn sales from insulin business.

§ Strong EBITDA margins at 36.4%: On operational front EBITDA came in at Rs 1.7bn (up 31.4% YoY and 42.8% QoQ). EBITDA margins increased sharply and stood at 36.4% (up 400bps YoY and 690bps QoQ) largely due to higher GMs and improved profitability in Oaknet. Gross margin increased both on YoY and QoQ basis, by 450bps and 126bps to 83.2% during the quarter on better product mix. PAT came in at Rs949mn (flat YoY); largely in line with our estimate. Tax stood higher at 16.1%. Depreciation & finance charges came in higher as expected due to recent acquisitions. Net debt levels have reduced by Rs1bn QoQ to Rs6.7bn.

§ Key concall takeaways: Business mix: Better product mix, scale up of new products and softening of input costs played out well for the company. Branded formulation growth was aided by price hikes and new introductions. Eris is targeting to launch four first-in-market combinations through its own R&D pipeline and the relaunch opportunity for two (FCM injection and Linagliptin) “at risk” products in FY24. Further company will be launching Glargine and Liraglutide – injectable diabetics from MJ’s pipeline in Q4 FY24. Guided for Rs500mn of revenues from insulin business in FY24 and achieve break even by end of Q4FY24. Oaknet has achieved 18% organic growth in base business in Q1 with EBITDA margin of +25% in from 10% margin in FY22. Eris will be entering into pediatric dermatology from Q2FY24. Expect to scale up further and reach corporate level in FY24. As capacity utilization of new derma block scales up, margins will improve. Overall guided for +35% OPM in FY24. Capex would be mostly incurred towards maintenance cost. Expect debt levels to reduce to Rs 4bn levels by end of FY24.

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