Buy Caplin Point Laboratories: Research Report By ICICI-Direct

Strong LatAm growth drives numbers…

Q2FY21 revenues grew 18% YoY to | 268 crore. EBITDA margins improved 131 bps YoY to 32.6% due to higher gross margins partially offset by higher staff costs due to recently acquired subsidiaries. Sequential margin improvement (up 279 bps) was on account of a better overall operational performance. Subsequently, EBITDA grew 22.9% YoY, 22.1% QoQ to | 87 crore. However, PAT remained flattish (down 0.7%) YoY at Rs 57 crore due to lower other income and higher tax outgo.

Robust growth in emerging markets likely to continue

Emerging markets (EM) account for 92% of revenues and consist of LatAm – 87% (both Central, South America) and Africa- 5%. Revenues grew at 25% CAGR over a decade mainly due to 1) early mover advantage in these untapped markets, 2) geographical expansion (starting with two countries to 10 currently), 3) ability to address market gaps, especially in generics space (via trading model) with a hold on end-to-end distribution channels. We expect growth momentum to persist mainly due to further expansion in front end, increasing product basket, change in product mix, launching of own brands. Also, entry into South American countries is likely to propel growth. We expect EM revenues to grow at ~21% CAGR in FY20-23E to Rs 1365 crore.

Foray into high risk-high return US injectable market

With a calculated approach to focus on injectables in the US, the company established an injectable plant in Tamil Nadu in 2014. Currently, the portfolio comprises 19 filed ANDAs, of which nine have already been approved. At present, the company has ~40 products in the pipeline. In FY20, revenue contribution from the US increased to 8% from just 2% in FY19. We expect US revenues to grow at ~35% CAGR in FY20-23E to Rs 173 crore on the back of incremental product launches.

Valuation & Outlook

Q2 results were above I-direct estimates on all fronts. After scripting a unique story by growing in uncharted territories, Caplin is looking at growth in known markets. These new markets of South America, US are a big opportunity but fraught with new challenges. That said, we continue to believe in Caplin’s capability to replicate the success story in new markets. Secondly, despite likely dent in margins, return ratios due to investment phase in new markets, these prints continue to demonstrate earnings, balance sheet strength. By thriving in lesser known CA markets and cracking the most difficult US generic pharma code of injectables, that too in different therapies, Caplin has created its own identity with long drawn plans on the back of significant capex lever. The company continues to offer a compelling risk-reward scenario at current valuations. We maintain BUY rating and arrive at our target price of | 605 (12x FY23E EPS of Rs 50.3).