THE RIGHT PRESCRIPTION FOR GROWTH

Eris Life-sciences is an Ahmedabad-based branded generic selling pharma company. The company came out with its Rs1741 crore IPO in June last year, which was one of the largest ever witnessed in the pharmaceutical space and was subscribed 3.29 times. 

Eris has a diverse product portfolio, which comprises of 80 mother brand groups and focuses primarily on developing, manufacturing and marketing products which are linked to lifestyle-related disorders that are chronic in nature and are treated by specialist and super-specialist doctors. 

The company has a presence in chronic therapy segments such as cardiovascular, anti-diabetes and specialty acute segments like vitamins, gastroenterology, women’s health and bone health.

Eris earns zero revenue from exports; hence, it is immune to the US FDA issues currently plaguing the Indian pharmaceutical companies. This serves as a big distinctive factor for the company as compared to its peers. Also, the company has a manufacturing facility at Guwahati in Assam which ensures tax relief till 2024. The annual manufacturing capacity of the unit is 1500 million tablets, 250 million capsules and 40 million sachets. During the last quarter, the operating capacity utilisation of the company remained at 65 per cent on a single shift basis in Guwahati, which is ideal considering its recent expansions. 

This facility at Assam accounts for about 75 per cent of sales and the balance is outsourced to contract manufactures. As a result, the effective tax rate for the company was as low as 8.3 per cent in FY17 and 12.7 per cent in FY16. The company expects it to be in the range of 8-9 per cent on a consolidated basis for the next year. 

INDUSTRY OVERVIEW 

India is one of the fastest growing pharmaceutical markets in the world and is also the largest provider of generic drugs globally, accounting for 20 per cent of global exports in terms of volume. According to the Pharmaceuticals Export Promotion Council, India’s pharmaceutical exports stood at US $16.8 billion in 2016-17 and are expected to grow by 30 per cent over the next three years to reach US $20 billion by 2020. 

Also, close to 550 manufacturing facilities in India are US FDA compliant, which is highest outside of the US. To strengthen the pharma sector, the government unveiled 'Pharma Vision 2020' aimed at making India a global leader in end-to-end drug manufacture. Also, the approval time for new facilities has been reduced to boost investments. Lately, consolidation has become an important characteristic of the Indian pharmaceutical market as the industry is highly fragmented. 

Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as cardiovascular, anti-diabetes, antidepressants and anti-cancer, which are on the rise. 

ACQUISITIONS FOCUSING ON SPECIALTY 

The company made strategic small acquisitions in the recent past to complement its existing product portfolio. Eris recently acquired Strides Shasun's domestic branded formulations business for Rs500 crore. As per the agreement, Eris will acquire the marketing and distribution rights of the products in India, while Strides will retain the global rights. The India branded generics business being divested by Strides had sales of Rs181 crore for FY17. 

With this, Eris will strengthen its position in the central nervous system segment, which is third largest chronic segment, and also in gastro and women's healthcare segments. Eris plans to transfer the production of acquired drugs to its Guwahati plant over the next 12 months. 

Eris has successfully added additional 500 distributors through its Strides Shasun acquisition. Moreover, the management has guided to complete the purchase price allocation by Q4FY18. Strides had close to 70 per cent of the sales from 3 southern states and 50 per cent from Tamil Nadu itself. Eris can improve the sales by selling these brands on a pan-India basis, leveraging its existing network of 1600 Medical Representatives (MRs). 

In the last year-and-half, Eris also acquired UTH Healthcare for Rs12.85 crore, which is engaged in pharmaceuticals and nutraceuticals business. The company also acquired trademarks of 40 brands from Amay Pharma to strengthen portfolio in the cardiovascular and anti-diabetics therapeutic segments. It also acquired 75.48 per cent stake in Kinedex Healthcare, which caters to mobilityrelated disorders. 

Focus on Tier-1 and Metro Cities Eris is focusing on metro cities and tier-1 towns and cities, where the incidences of lifestyle disorders and the concentration of specialists and super specialists are on the higher side. More than 85 per cent of endocrinologists, cardiologists and gastroenterologists are located in metro cities and tier-1 towns. Also, the company's product portfolio, which relies on prescriptions by these specialists and super specialists, reported about 76 per cent of its revenues from these areas in FY17. These geographies present good growth prospects for the company. 

FINANCIALS 

The performance of the company till date for FY18 has been on expected lines with the topline and bottomline registering 13.7 per cent and 19.45 per cent YoY growth, respectively. In Q3 FY18, the company registered a revenue growth of 13.3 per cent YoY to Rs209 crore on a consolidated basis. The company reported EBITDA of Rs81 crore, as against Rs73 crore in the same period last year. The rise in material costs by 52.8 per cent and 36 per cent jump in its employee expenses impacted the company’s margins, which fell by a minor 50 bps for the quarter. The company reported a profit of Rs75 crore in the quarter, registering a 10.1 per cent YoY growth 

On an annual basis, the company’s revenue grew 21 per cent YoY in FY17 to Rs725 crore. Eris reported a 65 per cent jump in EBITDA to Rs288 crore and the margin strengthened by an unbelievable 1040 basis points to 39.7 per cent from 29.3 per cent in FY16 on account of lower input costs and operational leverage. The company’s PBT increased 71 per cent to Rs264 crore in FY17 whereas its PAT grew 79 per cent to Rs241 crore leading to an EPS of Rs17.61. 

VALUATIONS 

The company's PE ratio stands at 46.07x, as compared to its peers Glaxosmithkline Pharma (53.45x) and Glenmark Pharma(18.29x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 54.32 per cent and 146.76 per cent, respectively. Eris has a good RoE track record with 3-year RoE of 48.56 per cent. The company has a debt of Rs400 crore taken as a long term loan facility to finance the acquisition of domestic formulation business of Strides Shasun. Eris has been maintaining a healthy dividend payout of 17.94 per cent. Over the four years between FY13-17, the company’s revenue has clocked growth of 17 per cent CAGR, while EBITDA and PAT grew at a CAGR of 35 per cent and 43 per cent, respectively. 

CONCLUSION 

The company’s nutrition division is expected to add to the revenues from Q1FY19. The biggest advantage for the company from the acquisition of Strides is its product portfolio for which there is lot of uncovered market. We expect business from Strides to witness a turnaround by Q2FY19. Moreover, the company maintained its guidance for tax rate between 8 to 9 per cent in FY19. 

We recommend our reader-investors to HOLD the scrip at this level.