Prabhudas Lilladher has issued a BUY recommendation for Eris Lifesciences, setting a target price of Rs 1,420. Eris demonstrated solid growth in Q2 FY25, maintaining strong margins and capitalizing on acquisitions like Swiss Parenterals and Biocon's portfolio. With anticipated revenues of Rs 30 billion and an operating margin of 35% in FY25, Eris Lifesciences is strategically positioned to leverage growth in core segments, particularly within dermatology and cardiometabolic treatments. As new product launches and acquisitions add to Eris’s revenue streams, its focus on expanding in-house production and maintaining operational efficiency provides a stable outlook for investors.

Financial Performance and Earnings

Q2 FY25 Financial Highlights: Eris Lifesciences posted EBITDA in line with estimates, reaching Rs 2.65 billion, a 46% year-over-year growth. Despite an increase in operating costs, the company achieved an impressive 35.7% operating margin, up 110 basis points quarter-on-quarter. Revenue Growth Through Acquisitions: Revenues rose by 47% year-over-year, bolstered by successful integration of Swiss Parenterals and synergies from Biocon’s portfolio. Organic growth for Eris’s core business reached 7% in the first half of FY25. Gross Margins and Operating Profit: Gross margins remained steady at 74.8%, although the product mix from recent acquisitions slightly impacted year-over-year margins. Base business operating profit margin increased by 374 basis points year-over-year.

Strategic Acquisitions and Growth Drivers

Swiss Parenterals and Biocon Integration: Acquisitions, including Swiss Parenterals, contributed Rs 820 million in Q2 revenue, up from Rs 730 million in Q1. The Biocon acquisition delivered a consistent run rate with Rs 1.34 billion in quarterly revenue, reflecting stable integration and growth. Broadening Dermatology Offerings: With an expanding in-house production of dermatology products—from 11% in Q1 to 30% by Q2—Eris enhances operational efficiency and cost control. Cardiometabolic Market Opportunities: Patent expirations in the cardiometabolic segment are expected to benefit Eris, providing new opportunities in a high-demand therapeutic area.

Operational Developments and Production Capabilities

New Product Launches: Eris launched ERLY, a liraglutide brand (GLP-1), targeting a market in high demand for cardiometabolic treatment solutions. Additional product launches are scheduled for H2 FY25, which should further support base business growth. Upcoming Manufacturing Milestones: The Bhopal facility is set to begin RHI vial production next month, which is expected to enhance Eris’s margins in FY26. The Ahmedabad facility, benefiting from the 115BAB scheme, will further ramp up production, particularly for oral solid dosage exports. Export Potential: The Ahmedabad facility also launched a CDMO (Contract Development and Manufacturing Organization) for OSD-based exports, with EU-EMP inspection planned for Q4, positioning Eris to target large European generic pharmaceutical players.

Financial Position and Capital Expenditure

Revenue Projections for FY25: Eris targets Rs 30 billion in consolidated revenue with a projected operating margin of 35%. Incremental revenues from acquired businesses should support this goal. Controlled Debt Levels: Eris reported net debt of Rs 25 billion with a goal to reduce it to Rs 20 billion by FY26, reflecting a proactive approach to debt management. Capital Expenditure and Investments: Eris has guided for Rs 1–1.2 billion in capex, plus Rs 540 million for a 30% stake acquisition in Levim. This investment will support an end-to-end presence in biologics, offering economies of scale for Eris’s future expansion in high-growth segments.

Key Financial Metrics

Stable Profit Margins: EBITDA margins for FY24 were recorded at 33.6%, with an expectation of 35.2% for FY25, rising to 36.9% by FY27 as efficiencies from acquisitions are realized. Profit After Tax (PAT) Forecast: Eris’s PAT for FY25 is projected at Rs 3.8 billion, with a significant 42.3% increase expected in FY26, reaching Rs 5.4 billion as operational efficiencies improve. Return on Equity (RoE) and Return on Capital Employed (RoCE): RoE is projected to rise to 17% in FY26, with RoCE reaching 16.9%, indicating strong capital utilization and profitability growth.

Long-Term Outlook and Valuation

Valuation Based on Earnings Growth: Prabhudas Lilladher values Eris at a target price of Rs 1,420, implying a valuation of 16x EV/EBITDA on projected September 2026 earnings. This valuation considers Eris’s growth prospects, high-margin product mix, and strategic acquisitions. Investor Appeal and Sector Positioning: Eris’s positioning in the high-demand therapeutic segments of dermatology and cardiometabolic treatments strengthens its appeal to investors. Coupled with the company’s efficient integration of acquisitions, Eris stands out as a stable investment within the Indian pharmaceutical industry.

Conclusion and Investment Recommendation

Eris Lifesciences’ growth strategy, bolstered by strategic acquisitions and expanding product lines, supports the positive outlook from Prabhudas Lilladher. With consistent revenue growth and cost efficiency, the company is well-equipped to meet its FY25 targets and deliver value to shareholders. Prabhudas Lilladher reaffirms its BUY rating for Eris Lifesciences, maintaining a target price of Rs 1,420.

Disclaimer

This report is for informational purposes only. Investors should conduct their own due diligence or consult with a financial advisor before making investment decisions, as market conditions and company performance may impact outcomes.