Shares of Zydus Lifesciences have been on a downward trend recently, falling 16% from their recent peak of ₹1,324 to the current trading price of ₹1,114. According to Elara Capital's latest report, this decline presents a favourable entry point for investors.
Elara Capital hosted meetings with Zydus Lifesciences' management in Asia, which reinforced their confidence in the company’s growth prospects. "The recent correction in the stock price, noise around competition in gAsacol HD and concerns over the peak of profitability are completely unwarranted and present a great opportunity to buy the stock, in our view," said the brokerage.
Against this backdrop, the brokerage upgraded its rating on the stock to 'buy' from an earlier 'accumulate' rating and also revised its target price higher to ₹1,497 apiece. The latest target price signals an upside potential of 34.40% from the stock's previous closing price.
The brokerage noted that competition in gAsacol HD was anticipated and thus not surprising. It also pointed out that the emergence of gMyrbetriq presents an unforeseen opportunity, with no major concerns about diminishing profits as these were not factored into long-term expectations or the stock price.
Looking ahead, the brokerage expects a decline in revenues and profits from gRevlimid in FY27, which may present growth challenges for that year. However, this scenario was anticipated and incorporated into the stock’s valuation.
Additionally, there are other significant products in the pipeline, such as gIbrance (palbociclib), gAdempas (Riociguat), and gCabometyx (cabozantinib), whose launch timings are uncertain but are expected to fully offset the impact of the reduction in gRevlimid’s revenue, it noted.
The brokerage highlighted the company's focus on its specialty business as the next growth driver, particularly in rare diseases and orphan drug candidates. The company remains optimistic about the ongoing saroglitazar phase IIb/III study in Primary Biliary Cholangitis (PBC), with data expected by mid-2025.
If the results are favourable, the drug could launch in the US by FY27. For the PBC indication, the company plans to build its own sales force, potentially consisting of 60–80 representatives. The brokerage noted that Zydus Lifesciences is also considering acquiring a commercial-stage US specialty company to bolster its commercialization strategy for saroglitazar.
Additionally, phase II clinical trials for saroglitazar in Metabolic Dysfunction-Associated Steatohepatitis (MASH) in the US market are progressing as planned, although it is still too early to make a definitive assessment of its potential in this indication.
The brokerage noted that management sees significant growth potential in the Rest of the World (RoW) business, which could become a major driver of overall growth, particularly in FY27 when the US business might face challenges.
Similar to the domestic market, the RoW segment is expected to benefit from the company's focus on new chemical entities (NCE) and biosimilars, alongside further geographic expansion.
The brokerage stated that the management has reaffirmed its revenue growth guidance of high teens for FY25, along with an expected improvement of approximately 150 basis points in EBITDA margin, bringing it to around 29%. Both these projections remain unaffected by the entry of competition in gAsacol HD.
The brokerage further noted that Zydus Lifesciences' profitability has significantly improved over the past 2-3 years, even when excluding the benefits from large limited-competition products in the US. As a result, even if margins decrease slightly in FY27 due to the absence of such products, they are likely to remain better than historical levels.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
