Gland Pharma faces a revenue growth hurdle in FY23; stock falls

The stock of Gland Pharma slipped about 6 per cent in trade on Thursday on the back of a muted show in the June quarter. Brokerages cut their earnings estimates for the current financial year by up to 20 per cent reflecting the muted expectations.

The revisions are largely on account of supply chain issues, sharp decline in revenues for the current year in India and rest of the world (RoW) markets and higher operating expenditure. Due to these reasons, most brokerages expect overall revenues to be static in the current year as compared to financial year 2021-22.

Rahul Jeewani and Punit Pujara of IIFL Research expect FY23 will be a washout year with a 9 per cent fall in net profit. This will be led by a 40 per cent year-on-year (YoY) dip in Gland Pharma’s India revenues in FY23 while RoW revenues are estimated to fall by 20 per cent.

Weakness in these two geographic groups was reflected in the company’s June quarter sales. While overall sales fell by 26 per cent YoY, India sales fell a steep 72 per cent while RoW revenues were down 55 per cent. While the India business-to-business (B2B) sales were impacted by the planned shutdown of facilities, higher sales of Covid-19-related drugs such as Remdesivir meant an unfavourable base. The two together accounted for 18 per cent of turnover. Delay in supplies of raw material inputs impacted its order intake and delivery in these markets.

Despite the operational difficulties, gross margins for the company improved 284 basis points on a YoY basis and 579 basis points sequentially to 56.3 per cent as a higher proportion of sales came from the core markets. The year ago share of sales from core markets was at 65 per cent while the same was at 82 per cent in Q1FY23.

The low margin syringes business was impacted by supply chain challenges and shutdown of two manufacturing lines in the domestic market. Operating profit margins declined by 631 basis points YoY to 31.5 per cent due to higher employee costs, power and fuel expenditure. Margins, however, sustained on a sequential basis as the company prioritised its limited material supplies for the US market as compared to the lower margin India and RoW markets.

The management expects component shortages to ease in the second half of FY23 and this will allow the company to launch new products and scale up inventory. Incremental revenues from anticoagulant Enoxaparin and normalisation expected in antifungal Micafungin will lead to business recovery in the second half of the fiscal, believe analysts at IIFL Securities.

Kotak Securities has cut their earnings estimates for the next couple of years by 11-13 per cent to factor in muted sales from RoW, lower profit share in the US and higher costs. They also highlight the higher vulnerability of Gland’s B2B generic model to supply disruptions compared to other contract research and manufacturing players. While near term outlook is expected to be sluggish, what offers medium term growth visibility, according to Alankar Garude and Samitinjoy Basak of the brokerage, is the product pipeline comprising of 61 abbreviated new drug applications, entry into new markets like China where the first product is expected to be approved in the second half of FY23.

While the medium term prospects are robust, given the multiple headwinds in the near term investors should await sustained export trajectory and margins before considering the stock.