Q4FY23 Review: Gland Pharma: Limited visibility on growth normalization

19 May 2023 , 11:56 AM

Gland’s Q4 Ebitda missed expectations by 40-45%, owing to Penem plant shutdowns, tender seasonality in the RoW business, and negative operating leverage due to lower topline/investments for the business. Despite FY23 being a wash-out year with overall revenue decline of 18%, visibility on growth normalization remains poor given increasing competitive intensity in key products (Enoxaparin/Heparin), lower revenue accretion from new launches and inventory rationalisation being done by customers. Analysts of IIFL Capital Services downgrade FY24/25 Ebitda by 17/14% on an exCenexi basis and overall EPS by 25/15% owing to multiple headwinds.

Gland is at best a 10-12% organic growth story…: 

Post Cenexi acquisition, Gland’s revenue exposure to DMs will increase to ~80%; analysts of IIFL Capital Services believe DMs portfolio can at best grow at ~10% Cagr, given increasing competitive intensity in Injectables segment and declining revenue contribution from new product launches (3% in FY23 vs 10% in FY20/21). While RoW/India business can potentially grow at ~20% Cagr driven by MS gains in South-East Asia and ramp-up in China, analysts of IIFL Capital Services believe Gland’s overall organic revenue can grow only ~10-12% Cagr. 

…assuming some headwinds don’t materialise: 

Gland has seen incremental Chinese competition in Enoxaparin/Heparin and its top-10/30 products declined 20-25% YoY in FY23, per Exports data. Incrementally, Gland has lost one customer to whom it was supplying 14-15 products, while another customer (likely Athenex) that went bankrupt contributed Rs2bn revenue in FY23 (6% of overall revenue). Although mgmt expects limited impact from these customer discontinuations, there remains a downside risk to our organic growth assumption of 7% for FY24. 

Cenexi acquisition to dilute Gland’s margin profile and analysts of IIFL Capital Services estimates assume Cenexi’s Ebitda margins to improve from 7.5/13.5% in H2CY22/CY22 to 15% by FY26, led by Gland’s initiatives to in-source manufacturing to India facilities and cost optimisation program. Although Gland’s overall margins will contract to 24-25% post Cenexi acquisition, our assumptions imply 29-30% margins for the base biz.