Gland Pharma: Initiate coverage with ‘neutral’, set 12-month price target at Rs 2,637

Action: Initiate coverage with ‘neutral’. We set a 12-month price target at Rs2,637, based on 30x FY23F EPS of Rs87.9 (implied upside: 12%). Gland Pharma is a play on the niche sterile product opportunity in the pharma space. The company is one of the largest manufacturers of injectable products globally, with a strong execution track record. The company has delivered 28.9%/35.7% revenue/PAT CAGR over FY2010-20. Unlike many of its global peers in injectables, it has successfully cleared USFDA inspections, despite increasing scrutiny by the regulator. Gland has a B2B business model, which in our view makes its revenue less volatile than B2C, and enables the company to leverage its manufacturing setup and product portfolio. We believe that demand for such consolidated high-volume lower-cost manufacturing will remain as long as competitive pressures in generics remain high.

Competition in injectables is likely to increase, but Gland has competitive advantages in the form of largescale and low-cost, in our view. In the future, the company intends to move into complex product segments.

Growth outlook. Expect 22.9% earnings CAGR over FY21-23F We see no large product-specific opportunity for Gland in our forecast period, so growth will likely be driven by increasing penetration in new geographies and market share in older products. The Covid-19 pandemic and consequent surge in demand for injectables catalysed Gland’s entry into new geographies and relationships with institutions. China is likely to emerge as an important growth driver after FY23F. We forecast revenue CAGR of 16.9% over FY21-23F, on the large base of FY21F. We assume ebitda margin to sustain at 38-38.5% as some likely contraction in gross margin is negated by operating leverage. We forecast PAT CAGR of 22.9% over FY21-23F and free cash flow of ~ Rs18.3 billion over FY22-23F, with net cash balance of ~ Rs 49.3billion by end-FY23F. Our forecasts do not factor in upsides from potential M&A or vaccine supply contracts in the near term.

Valuation. We believe Gland can trade at a premium to generics companies with front-end presence, given less volatile earnings and a more capital-efficient business model. The medium-term growth prospects are supported by scope to expand into new geographies, new contracts, and potential M&A. The current premium adequately captures the growth prospects and the company’s execution track record, in our view. We refrain from assigning a higher valuation multiple, given inherent risks in generics, such as regulatory uncertainty, price deflation and inherent slowdown in growth as the base expands.