Krka: integrated model underpins steady returns (BUY)

We reinstate our historical BUY rating on Krka (from Under Review), with a new 12M price target (PT) of EUR 115.2, offering upside of c.27%. In our view, Krka should deliver a top-line 2022-25E CAGR of c.6.4% in constant currency (CC) terms, in line with both its medium-term guidance of “at least c.5%, in volumes or value”, and the average CC growth of c.5.9% over the last decade (5.2% in volume terms). Krka’s investment case is underpinned by: 1) a high level of vertical integration (API to distribution); 2) continuous investment in volume growth; and 3) adding value though innovative formulations, e.g. fixed dose combinations. We believe our expected average 2022-25E ROCE of 12.9% (trailing 5Y, 15.0%) and 3Y forward dividend, plus a buyback yield of nearly 8% in EUR (c.6.6% on our PT) make a strong case for owning Krka. China, in our view, remains the wildcard in our forecasts, as growth depends largely on success in State tenders. Krka knows the process well from Western Europe but is still building a track record in China. If it can crack it, however, the Chinese generics market (c.USD 100bn) is worth double that of Western Europe, on Krka’s estimates.