Zydus Lifesciences - High Base To Keep Earnings Per Share Muted, Specialty Growth Key: HDFC Securities

HDFC Securities Institutional Equities

Zydus Lifesciences Ltd. has corrected over 25% from its 52-week high in the last two-three months, due to-

1. competition in gAsacol HD (Teva, launched in Sep-24),

2. U.S. Food and Drug Administration issues at its injectable plants (in Jarod and SEZ Ahmedabad),

3. unfavorable court ruling for Cabozantinib (Cabometyx), and

4. concerns about growth trajectory beyond FY26 due to tapering gRevlimid sales starting in Jan-26.

Over FY19-24, Zydus delivered 8% and 13% sales and Ebitda CAGR, respectively. Going forward, we expect an FY24-27E sales CAGR of 8%, with the Ebitda margin dropping from 29% in FY25E (27.1% in FY24) to 24.8% in FY27E, due to tapering gRevlimid sales and steady research and development for its novel molecules, leading to a muted Ebitda/ EPS CAGR of 5%/ 3% over FY24-27E.

We anticipate that exRevlimid sales in the U.S. will see high-single-digit growth, supported by new launches and steady traction in the base business. Moreover, Zydus has steady growth visibility in India formulation supported by new launches, scale-up in specialty, and MR additions. Its advancements in novel molecules, biosimilars, and vaccines provide long-term growth visibility.

We have rolled forward our target price to Rs 1,100 based on 26 times Q3 FY27 EPS. The 'ADD' rating remains.

After the recent correction, Zydus is trading at 21.6x/21.5x/23.6x PE on FY25/26/27E and is available at a 15+% discount to its large-cap peers (Cipla, DRRD, Lupin, Sun). gRevlimid to lead to tapering in the US, partly to be offset by new launches.

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