Suven’s pharma CDMO sales (down 21% q/q to Rs2bn) were less than expected as the contribution from one Covid molecule wasn’t as huge as expected. Specialty CDMO clocked sales of a good Rs1.3bn (up 30% q/q); formulation sales were Rs184m (up 28% q/q). The gross margin was steady at 69-70%. Staff costs and other expenses were higher (more transportation and distribution costs) at respectively 8.6% (avg. 6-6.5%) and 17.4% of sales (vs. avg. 14-15%).

This translated to a 43% EBITDA margin. The higher tax rate (43% vs avg. 25-33%) eroded profit, which was Rs917m (42% y/y, adj. for the share of profit from rising pharma). We slightly trim our earnings estimate, factoring in higher formulations sales (boosted from Casper’s site) which would drag on margins.

Traction in CDMO continues. The Q4 order for Covid-19 drugs was not as good as anticipated. For pharma CDMO, the company has five projects in phase-3 and five molecules commercialised. Management expects one product to be commercialised by end-FY23. Till then, core molecules are expected to grow 10-15%. On CDMO specialty chemicals, good traction was seen since a molecule was added (in Q4 FY21). On the high base, growth would be flat till a molecule is in the development stage and likely to be clinical by FY24.

Formulations growth to pick up; margins squeezed. Suven has launched eight products so far in the US and has eight pending approvals. It plans to file 7-8 ANDAs in FY23 from the formulations plant. The required capacities to back this business will be aided by the newly acquired SEZ unit from Casper Pharma (two filed). Management will file 15 ANDAs in FY23 from Casper’s site on approvals subject to the US FDA’s awaited inspection. With the formulations business scaling up, management expects EBITDA margins of ~40% ahead.

Valuation. Long-term guidance of 10-15% revenue growth, 40% EBITDA margins and 25% tax rate maintained.