Upcoming Commercial Supply Of Tranexamic Acid And UDCA Will Tap New Markets

Key Takeaways

• Shilpa Medicare's oncology and non-oncology segments are poised for revenue growth through new product launches and market expansions.
  
• Diversification in CDMO and promising developments in biologics could provide stable revenue streams and enhance market share.
  
• Reliance on a key customer and complex product approvals, coupled with declining API revenue and high taxes, threatens revenue stability and financial flexibility.

Catalysts

Manufactures and sells active pharmaceutical ingredients (APIs), finished dosage formulations, biosimilars, recombinant albumin in India, the United States, Europe, and internationally.

• Shilpa Medicare's oncology segment has multiple new product validations and potential formulation launches, which are likely to drive revenue growth in the near future. This could increase revenues and strengthen net margins by leveraging captive APIs.
  
• The company is expanding its non-oncology business with projects like the Tranexamic acid and Ursodeoxycholic acid (UDCA), both of which are on track for commercial supply in the coming quarters, potentially boosting revenue and margins as these markets develop.
  
• Shilpa's CDMO business is diversifying its projects, including those with fast track FDA designations, which could bring stable revenue streams and enhance earnings through complex program endorsements.
  
• Shilpa's biologics segment sees promising developments, such as multiple product approvals and ongoing clinical studies that should enhance market share and potentially lift revenues due to growing demand and product availability.
  
• The company continues to strengthen its formulation business with significant ongoing project launches and strategic partnerships, which suggest likely increases in revenue and profit growth, potentially improving earnings as these products enter established markets.

Shilpa Medicare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shilpa Medicare's revenue will grow by 32.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 30.9% in 3 years time.
• Analysts expect earnings to reach ₹8.7 billion (and earnings per share of ₹63.53) by about January 2028, up from ₹610.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.7x on those 2028 earnings, down from 112.7x today. This future PE is greater than the current PE for the IN Pharmaceuticals industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 16.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Shilpa Medicare Future Earnings Per Share Growth

Risks

• The company's reliance on a major customer, Intas, who previously received an FDA warning letter, has led to decreased oncology business revenue, with future growth still uncertain. This directly impacts revenue stability and growth potential.
  
• The API business experienced a year-on-year revenue decline of 13%, signaling potential issues in product demand or market competition, which could affect overall revenue generation.
  
• High effective tax rates, anticipated at around 35% in the near term, could limit net profitability and reduce net margins despite operational performance improvements.
  
• Significant ongoing CapEx investments, primarily in the Albumin facility, may constrain free cash flow and limit the ability to reduce debt swiftly, impacting net earnings and financial flexibility.
  
• Dependency on approvals and successful commercial launches of complex and pipeline products introduces risks in achieving projected revenue targets, particularly if regulatory or competitive challenges arise.

Valuation

• The analysts have a consensus price target of ₹1208.0 for Shilpa Medicare based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1525.0, and the most bearish reporting a price target of just ₹891.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹28.3 billion, earnings will come to ₹8.7 billion, and it would be trading on a PE ratio of 26.7x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹793.3, the analyst's price target of ₹1208.0 is 34.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.