ERIS LIFESCIENCES LTD (ERIS IN): 1QFY20 – Increase in YPM* drives the margin expansion

Dated: 30th July 2019

1QFY20 Results

• ERIS Lifesciences (ERIS) reported revenues 9% YoY at Rs 2,743 mn. In 1QFY20, the Base business revenues (includes UTH products) grew by 10% YoY, the Strides revenues reported a 16% YoY growth. Kinetix now part of the standalone entity, reported a decline of 9% YoY in the revenues.  In the subsidiary, Aprica revenues increased by 15% YoY.
• The EBITDA increased by 18% YoY to Rs 1,045 mn v/s Rs 886 mn in 1QFY19. The margins improved by ~280 bps to 37.1% due to lower employee costs and other expenses. The employee costs were lower in the quarter due to a one-off adjustment of the leave encashment liability on the assimilation of the Kinedex books.

• The PAT grew by 18% YoY to Rs 840 mn v/s Rs 713 mn in 1QFY19. The effective tax rate was higher at ~11.5% during 1QFY20 (Effective tax rate was ~8% YoY)

Management Commentary

• Chronic and subchronic therapies constituted ~84% of the total consolidated sales of ERIS and acute therapies constituted ~16% in 1QFY20. The Indian Pharmaceutical Market (IPM) sales composition stood at 55% from chronic and subchronic therapies and 45% from acute therapies during the quarter.
• The increase in the YPM* to Rs 0.44 mn per month in 1QFY20 led to the EBITDA margin expansion.  The YPM was Rs 0.41 mn per month in 4QFY29. The number of Medical Representatives (MR) increased to 2075 by June 2019.

• Management indicated that prescription sales are intact. The working capital pressure and increased competition from the online pharmacy; led to a decrease in inventory at the pharmacies. The lower inventory levels are now becoming a new norm for the sector.
• Management guided for the tax rate to remain in the 8-10% range. In FY19, 61% of the total manufacturing was done at the Guwahati Plant in Assam which is eligible to avail certain tax incentives including income tax exemption and GST subsidies. ERIS intends to increase the manufacturing of this plant.

Consensus Estimate (Source: market screener website)

• The close price of ERIS is Rs 395/- on 29-Jul-19. It traded at 16x / 13x the consensus EPS for FY 20E / 21E EPS of Rs 24.5 / Rs 30.2 respectively.
• Consensus target price is Rs 670/- implies a PE multiple of 22x on FY21E EPS of Rs 30.2