Prabhudas Lilladher has an accumulate call on Eris Lifesciences with a target price of Rs 704.
The current market price of Eris Lifesciences is Rs 646.60.
Time period given by the brokerage is one year when Eris Lifesciences price can reach the defined target.
Investment rationale by the brokerage:
Eris grew 6 per cent YoY in India formulations on the back of its traction in own portfolio without any trace of benefits from the acquisition of Strides products.
EBITDA margin declined by 90bps YoY though management guided for further improvement once the synergies of strides portfolio to be fully tapped. Guwahati plant currently contributes 60 per cent of sales in Q2FY19 and guided to increase contribution with further integration of Strides portfolio.
While we expect better utilisation rate due to the shift of acquired products, management is yet to explain the absence of inorganic growth of sales, EBITDA and PAT, which were due in FY19E post-acquisition of Strides portfolio and UTH healthcare in FY18.
We expect Eris to maintain gross margin at 84-86 per cent and EBITDA margin at 36-38 per cent in Fy19E and FY20E.
Current MR productivity is Rs4.5lakhs/month and guided to be higher with better traction of CNS portfolio going forward. The stock trades at 29x and 22x PE of FY19E and FY20E.
Investment in the acquisition of brands and market share without traction in sales and operating profit will increase debt and reduce key return ratios.
This will negate the benefits (lower leverage, strong cash flows and higher return ratios) of a domestic-focused pharma company.
We reduced our estimates of sales by 13-14 per cent, EBITDA by 18-19 per cent and PAT by 20-22 per cent in Fy19E and FY20E.
We downgrade our recommendation to Accumulate and reduce the target price to Rs 704.
Source: Economic Times