ARBP’s 4QFY20 revenues were expectedly strong, although the mix surprised with US injectables declining sharply. Gross margins surprised positively, expanding 290 bps QoQ, although the benefit was partly negated by a sharp increase in employee and SG&A spend, with EBITDA margins expanding only 130 bps QoQ. Even as ARBP’s US and EU businesses continue to surprise positively, the R&D scale-up on complex filings is only likely to play out from FY2024. Post the recent stock price run-up, we downgrade the stock to ‘reduce’ from ‘add’ with a revised FV of Rs 730 (from Rs 690).

ARBP’s 4QFY20 revenues were in line with estimates. EBITDA was only ~4% higher than estimates, with EBITDA margins at 21.8% (+130 bps QoQ; +90 bps vs KIE) with lower depreciation and lower tax rate resulting in PAT at 10% higher than our estimates. Debt further declined $87 m QoQ, with FY2020 decline at $365 m to $360 m (OCF generation at Rs 41 bn, with capex at Rs 1,400 crore).

ARBP has been gradually moving up the complexity curve for sterile products, with range of approvals, including colored products, PFS products, large volume lyophilized products and complex API products. We believe progress in other complex filings such as triamcinolone injectable, iron products, peptides and depot injections will be required to reach $400-500 m sterile sales in the US (from $280 m in FY2020E), and propel overall US growth, with existing high-volume injectables likely to reach a capacity bottleneck by FY2022.

However, progress in these areas has been understandably slow, while its inhalation (pMDI’s as well as Advair, though none in clinics) and biosimilars (Avastin filing for the EU in 1QFY22) products are yet to be filed, with meaningful profit contribution unlikely before FY2024.

We raise our estimates by ~5% each for FY2021/22. Given the recent sharp rally in the stock price, we downgrade the stock to ‘reduce’ (from ‘add’) with a revised fair value of `Rs 30 (from `690), valuing the stock at 13X FY2022E EPS or 8X FY2022E EV/EBITDA.