UBS has initiated coverage on Zydus Lifesciences (ZYDUSLIF: IN) with a sell rating, setting a price target at Rs 850.00.
The firm outlined its stance based on the company's performance and market expectations. Zydus's core EBITDA margin, which was between 19-20% before the uplift experienced in FY21-22 due to Covid-related demand, is expected to face challenges moving forward.
The firm highlighted that the earlier margin included significant contributions from gAsacol, where Zydus had been the only generic player. However, with new competition entering the market, the base profitability is anticipated to be lower, or at best, remain around the 19-20% mark.
UBS forecasts a headline margin of 26-30% for Zydus over the next three years, attributing this to one-off exclusivities in the United States. Despite these exclusivities, the firm maintains a cautious outlook on the stock.
The analysis suggests that the consensus may be overestimating the company's base margin and core earnings per share (EPS). According to UBS, the stock appears expensive trading at 35 times the FY27E price-to-earnings (PE) ratio, with the FY27E core EPS projected at Rs30.80 and headline EPS at Rs44.10.
The firm's core EPS forecast for FY27 is approximately 15% below the consensus, indicating a less optimistic view of the company's earnings potential compared to the market average.
This underpins their decision to set a sell rating on Zydus Lifesciences. UBS's analysis considers the impact of new competition for Zydus's generic products and the implications for the company's financials in the medium term.
The price target of Rs 850.00 reflects UBS's assessment of the company's value, taking into account the projected earnings and market conditions.
As Zydus Lifesciences navigates the competitive landscape and changes in demand post-Covid, the firm will continue to monitor its performance against these forecasts.
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