Beta Drugs has delivered a healthy performance. Buy for target price of Rs 1325 (27% upside): Nuvama

Beta Drugs (BETADR) is one of the leading players in the domestic oncology space and ranks among the top 10 in the cytotoxic market. Equipped with three state-of-the-art manufacturing facilities, it produces and markets a wide range of oncology (anti-cancer) drugs, which are available across major government and private hospitals. It expanded, upgraded, and received regulatory approvalsfrom INVIMA (Colombia) /INVISA (Brazil) for its key facilities which will aid exports. BETADR is well placed to capitalise on growth opportunities in the oncology drugs segment, aided by its comprehensive product portfolio, focus on product development, and improving export prospects with the receipt of accreditations and approvals. Besides sticky customers for contract manufacturing, backward integration and a healthy Balance Sheet boost confidence in the company. We expect a revenue/earnings CAGR of 26%/33% over FY23–26 led by product launches and an expansion in exports. We initiate coverage with a ‘BUY’ rating and a TP of INR1,325.

A diversified revenue base to de-risk the business

In FY23, BETADR derived ~30% of revenue from branded products; 48% from contract manufacturing for leading companies like Hetero Drugs, Cadila Pharmaceuticals, Alkem Laboratories, Shilpa Medicare, RPG Life Sciences, and Glenmark Pharmaceuticals; 13% from exports; 8% from APIs; and 1% from the recently launched dermatology and cosmetology divisions. This diversified revenue base helps de-risk its business model. It has been able to retain its CMO partners and secure repeat orders from most of them, while the proportion of branded business has increased over the past few years. The dermatology/cosmetology segment is expected to break even in H2FY24.

A strong products pipeline to boost the branded business

The branded formulation business contributed ~30% to revenue in FY23 from 25% in FY19, thanks to continuous product launches, especially the first-to-launch (FTL) or first-few-to-launch (FFTL) products, in the oncology space. As nearly 70% of its formulations are backward integrated with APIs, it enjoys competitive strength in the local market. Of its basket of 62 products, 35 relate to solid tumours, 18 to hematology, and 10 to supportive care. Most (~60%) of its products are injectables, which enjoys a superior profit margin. Its pipeline constitutes 23 products (including five new drug delivery systems or NDDS) to be launched over the next four years. Apart from launches, it aims to expand the number of prescribers (doctors), which will aid growth. We expect this business to clock 32% CAGR over FY23–26. We expect the healthy EBITDA margin to sustain on the back of high-value product launches.

Regulatory approvals open the door to Latin America and Africa

Though export revenue clocked 44% CAGR over FY19–23, it remains in the nascent phase (contributed ~12% in FY23). The decent size of the generic oncology market in semi-regulated markets offers immense growth potential. BETADR received approval from INVIMA (Colombia)/INVISA (Brazil) in March/April, which will open the door to Latin America and South African markets. In FY23, it filed 77 dossiers and is expected to file more than 150 dossiers in these geographies going forward. The management expects a Eurasian Economic Union (EAEU) audit, which will widen export opportunities in this region. We expect meaningful revenue from Latin America and South Africa to start flowing in within 12–18 months. We expect 43% export CAGR over FY23–26.

A calibrated expansion plan augers well

The management has adopted a calibrated expansion plan to meet the demand for its products. It has been incurring an annual capex of INR18–20cr (except FY21) to gradually expand capacities. In FY23, it expanded its oral solid doses (OSD)/injection capacities at Adley Formulations Pvt (100% subsidiary) by 92%/180% YoY and lyophilisation capacity by ~3x to boost growth. It plans to expand the API business in CEP markets (Europe). BETADR has added one new API line to focus on EU GMP audit. It incurred a capex of INR36cr over FY22–23, majorly from internal accruals. It is currently sitting on cash and cash equivalents of INR 19.16cr against a gross debt of INR 16cr (as of March 31), which holds scope for further expansion.

Initiate ‘BUY’ with a target price of INR 1,325

Historically, BETADR has delivered a healthy performance despite interruptions during the COVID-related lockdowns. A strong pipeline of FTL/FFTL products, approvals from the export market, client additions in the domestic market, and a healthy Balance Sheet augur well for the company. Average RoE stood at 24% in the past three years. The stock is currently trading at a P/E ratio of 15x average EPS for FY25/FY26. Our TP of INR 1,325 is based on 20x average EPS for FY25E/FY26E.