Earnings CAGR of 17% is estimated over FY21-24e; coverage initiated with ‘Buy’ rating and TP of `870
We initiate coverage on Eris Lifesciences (ERIS) with a Buy rating and a target price of Rs 870. In just 14 years (founded in CY07), ERIS has built a pure-play Branded Formulation business, with a revenue of Rs 13 bn (12M ending Sep’21). Notably, its PAT has nearly doubled to Rs 3.5 bn during FY16–21.
ERIS ranks among the Top 25 Indian companies in revenue terms. ERIS has presence across the value chain in developing, manufacturing, and marketing of branded pharma products in select Chronic therapies (the fastest growing company in Chronic category), such as Anti-Diabetes (AD; 37% of sales), Cardiac Care (31% of sales), and Vitamins/Minerals/Nutrients (VMNs; 23% of sales).
We expect a 17% earnings CAGR for ERIS over FY21–24 versus marginal earnings growth during FY18–21, driven by: (a) higher scope of penetration of technically superior drugs in AD therapy (adding Insulin-analogs to the AD portfolio), (b) its efforts to improve the coverage of super-specialists/high-end consulting physicians across therapies, (c) better operating leverage on improved MR productivity, and (d) higher in-house manufacturing.
We ascribe a three-year industry average P/E multiple of 22x on 12M forward earnings to arrive at our TP, which implies 27% upside from current levels.AD—Building an ecosystem around diabetes management: ERIS is a dominant player in AD therapy, with a market share of 5.6% (+160bp over FY16-21) in covered market. Within the industry level framework of increasing patient pool and evolving medication to lower hypoglycemia risk/weight management, ERIS has built an extensive range of products in Oral anti-diabetics (OAD).
Besides conventional OADs, it has also been launching the latest molecules (DPP4/SGLT2 inhibitors) and gaining market shares in these products. We project a 19% sales CAGR for ERIS in this category over FY21–24.Cardiovascular – Focus on aggressive expansion of super-specialty doctor coverage : Within this segment, ERIS has focused on medicines related to hypertension and lipid lowering subgroups that formed ~83% of current medication at industry level.
We expect a 13% CAGR for ERIS in this category over FY21-24, reaching Rs 5.3 bn of revenue.VMNs—rising awareness/co-prescription to improve outlook: We project a 16% sales CAGR in this category over FY21-24, reaching Rs 4.5 bn.Valuations and view: ERIS has delivered a 13% revenue CAGR, with a steady 35% Ebitda margin over FY17-21. Notably, the Ebitda margin improved to 39% in Q2FY22.
We expect 130bp margin expansion over FY21-24.Underpinned by the Chronic-heavy portfolio, the MR force driving brand play, brand turnaround capabilities, increased in-house manufacturing, superior (35%) Ebitda margins, and better-than-industry growth prospects, we ascribe 22x 12M forward earnings to arrive at our TP of Rs 870 for ERIS. This implies a 27% upside from current levels. Initiate coverage with a Buy rating.
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