MOSL: SHILPA MEDICARE (Buy)-Base business remains healthy-ANDA approvals – key for overall growth

Shilpa Medicare: Base business remains healthy; ANDA approvals – key for overall growth 

(SLPA IN, Mkt Cap USD0.6b, CMP INR435, TP INR593, 36% Upside, Buy)

• Performance marginally ahead of expectations: 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. of 19.9%). This, along with higher depreciation and lower other income, led to a PAT decline of 23.5% YoY to INR304m (est. of INR263m).
• FY18 performance: Sales were flat at INR7.9b, largely due to the transfer of the CRAMS business to a joint venture. EBITDA margin shrank 110bp YoY to 20.9%. PAT stood at INR1b.
• Robust pipeline for US market: SLPA continued exhibiting healthy traction from approved ANDAs (with sales of USD14-15m for FY18). SLPA's cumulative ANDA filings stand at 36 (as of FY18), with only two own ANDAs approved till date. Approval and subsequent launches can provide potential upside in the US business over the medium term.
• Valuation view: We lower our EPS estimates by 6%/7% for FY19/20 and to factor in the delay in the expected pick-up in ANDA approvals and increased R&D spend. We also reduce PE multiple from 25x to 23x 12M forward earnings to factor ongoing pricing pressure in US generics. Accordingly, we revise our TP to INR593 (36% upside; prior: INR686). However, we continue finding comfort from the strong ANDA pipeline for the US market and the healthy traction in the base business. Maintain Buy.