Gland Pharma rides high on valuation comfort, strong growth prospects

Target prices post brokerage upgrades point to more upsides

The stock of generic injectables major Gland Pharma is down 23 per cent since its highs in April this year. The stock has been under pressure on worries of gross margin pressures, component shortages and possibility of an equity stake sale by earlier promoters.

The company has been facing syringe shortage in the US market and is looking for alternatives even as it incurs higher freight costs for procuring syringes. Gross margins in the March quarter, which was down 533 basis points YoY, was impacted given higher freight/distribution costs. The company expects the situation to stabilise in the coming quarter.

Ankush Mahajan of Axis Securities believes that high competition in injectable generics and an increase in raw material prices may impact the company’s growth and margins in the upcoming quarters. In a report last month, the brokerage had assigned a hold rating given rich valuations 36 times FY23 earnings estimates.

While these are near term concerns, some brokerages believe growth prospects in the medium term remain strong and valuations have turned attractive post the recent correction.

Rahul Jeewani and Punit Pujara of IIFL Research, who recently upgraded the stock expect Gland Pharma’s US business to achieve a growth 15 per cent annually over the FY22-25 led by higher volumes and 20-25 new launches every year. They highlight that the injectables business is resilient given the low intensity of price erosion (unlike oral solids), have higher share of drugs which are in shortage and also deliver a 9-10 per cent volume growth.

Further, revenue growth in the medium term would be driven by its portfolio of complex injectables starting end FY24. Expansion of formulation capacity and value accretive acquisitions are expected to add to the revenue profile of the company.

CLSA too has a buy rating on the company give the opportunities in the outsourcing segment, innovators looking at alternatives beyond China, high entry barriers, global footprint and reasonable valuations. The company also finds mention in Jefferies Research’s bottom fishing ideas of stocks that are down over a quarter from their 52-week highs but remain high conviction bets.

While the Gland Pharma stock was up 3 per cent in trade on Tuesday, given that the target prices are upwards of Rs 3,400 a share, there is an upside of 28 per cent from the current price. Any dips can be bought into for the longer term as the company is set to deliver a 15-20 per cent revenue growth and a similar operating and net profit growth over the FY22-25 period.