MOSL: SHILPA MEDICARE (Buy)-US formulation on track-Outlook positive

​Shilpa Medicare: US formulation on track; Outlook positive

(SLPA IN, Mkt Cap USD0.8b, CMP INR551, TP INR805, 46% Upside, Buy)

• SLPA's sales rose marginally by 0.8% YoY to INR1.7b due to the shift of part of the CRAMS business to the JV with ICE. This shift of operations started 3QFY17 onward. The company, however, has witnessed improved traction on the formulations front over the past year. EBITDA margin expanded 30bp YoY to 20.2%, which, along with higher other income and lower taxes, led to an increase in PAT to INR241m from INR147m in the year-ago period.
• Sales much higher adjusting for business shift to JV: SLPA has begun shifting some of CRAMS' business to its JV with ICE. We note that the transferred part of the business recorded sales of ~INR550m, adjusting for which, YoY sales growth would have been ~33% (led by US formulation, CRAMS and Oncology API segments).
• Higher formulation sales drive gross margin: Gross margin improved 690bp YoY due to superior product mix. However, EBITDA margin expanded by just 30bp YoY due to higher other expenses (led by increased R&D spend).
• Gradual build-up in formulation sales: Formulation sales came in at INR200m for the quarter, compared to INR140m in 4QFY17, driven by two ANDA approvals for the US market. In addition, it has a good pipeline of 26 ANDAs pending for approval, largely in Oncology. On this basis, we expect SLPA to garner USD24m in FY18.