US growth revival largely dependent on regulatory clearance: TRP’s 1QFY22 performance was largely in line with our estimates. Growth momentum in the Domestic Formulation (DF) business was offset by a muted showing in the US business and a higher tax rate. It continues to work on alternate site filings to lower the impact of USFDA regulatory issues. We reduce our FY22E/FY23E EPS estimate by 7%/2% to factor-in a delay in resolving USFDA compliance issues at its key sites and higher utilisation of MAT credit, thereby increasing the effective tax rate. We value TRP at 25x 12-month forward earnings to arrive at our TP of Rs 2,800. Overall return ratios may be suppressed till there is a revival in US segment revenues. The current valuation adequately factors in an upside in the Branded Generics segment. We maintain our ‘neutral‘ rating.
Earnings in line; pricing pressure in the US outweighs growth in the DF business: Revenue grew 4% YoY to Rs 21.3billion (est. Rs 20.8billion) in 1QFY22. DF sales grew 18% YoY to Rs 11billion (51% of sales). Brazil sales rose 9% YoY (14% in CC terms) to Rs 1.5billion (7% of sales). Contract manufacturing sales grew 6% YoY to Rs 1.5billion (7% of sales). Europe sales grew 6% YoY to Rs 2.6billion (12% of sales). US sales declined by 26% YoY to Rs 2.7billion ($36million; 12% of sales). Gross margin contracted by 160bp YoY to 72.4% due to changes in the product mix. EBITDA margin contracted at a lower rate (110bp YoY) to 31.7% (est. 30.5%) due to a slightly better operating leverage.
Valuation and view: We reduce our FY22E/FY23E EPS estimate by 7%/2% to factor in a delay in ANDA approvals due to regulatory issues at Indrad/Dahej and an increasing effective tax rate. We continue to value TRP at 25x 12-months forward earnings and roll our TP to Rs 2,800.
We expect 13% earnings CAGR, led by an 11%/12%/8%/11% CAGR in DF/US/Brazil/Germany sales, and 80bp EBITDA margin expansion due to lower opex in DF after the sales force rationalisation. We maintain our ‘neutral’ rating as the current valuation adequately factors an improving outlook in DF/Germany/Brazil.