Shilpa Medicare Initiating Coverage Research Report By Motilal Oswal

Product approvals, superior execution to drive earnings

– Shilpa Medicare (SLPA) has been engaged in the manufacture of active pharmaceutical ingredients (APIs) since 1987. However, over a period of time, it has shifted its focus toward creating a niche in Oncology generics. In the process, it has developed a strong capability in manufacturing oncology APIs and formulations. Besides this, SLPA is investing in novel drug delivery systems (NDDS) and biotechnology.

– We believe that SLPA is well poised to deliver robust earnings CAGR of 41% over FY17-20, led by the commencement of sales in the US market and new product launches in the EU market. SLPA has a healthy pipeline of ~23 pending ANDAs (owned and for partners combined). We expect US sales to reach INR3.3b from INR250m in FY17. There is potential in US sales to grow 50% YoY in FY20, subject to outcome of litigation.

– SLPA has the necessary manufacturing capacity and US FDA clearances to succeed in APIs and formulations. It has done well on the compliance part in recent past.

– We expect its base business (CRAMS for ICE, Italy), which currently forms 52% of total sales, to remain stable and sustainable following 20% CAGR over FY15-17. The switchover of sourcing to SLPA led such strong growth. SLPA’s customer, ICE, has been enjoying majority share in this product due to complexity associated with sourcing of raw material. With JV formation with ICE for this business, we believe, SLPA to have 13% CAGR in revenues to INR6.4bn over FY17-20.

– We expect SLPA’s oncology API business, which currently forms 33% of total sales, to grow at 20% CAGR over FY17-20 to INR4.9bn led by increased market share in existing products and new product launches by its customers.

– The five-year average P/E for SLPA stands at 21x. P/E multiples for many pharma companies are lowered due to slowdown in the US business on account of regulatory hurdles/pricing pressure in the base business. However, we value SLPA at a premium valuation of 25x 12M forward earnings due to strong growth visibility from the US market, backed by a healthy product pipeline, which would also support margins improvement. In addition, SLPA has successful compliance history which has become critical factor to succeed in US market. On overall basis, we expect revenue and PAT CAGR of 29% and 41% over FY17-20E.

– We thus initiate coverage on SLPA with a Buy rating and a price target of INR805 on 12M forward earnings.”