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Building multiple levers to sustain the growth momentum

Margin surprise in 4QFY21 led by product mix and lower opex

* GLAND delivered better than expected 4QFY21, led by a superior product mix and better operating leverage. It is scaling up its COVID-19 vaccine manufacturing as well as expanding its sterile injectable/API/Oncology facilities to cater to upcoming launches.

* We raise our FY22E/FY23E EPS estimate by 5%/4% to factor in: a) strong traction in RoW markets, b) increased offtake of Remdesivir, c) higher business scope from Enoxaparin, and d) continued manufacturing efficiency.

* We also raise our P/E multiple to 31x (from 29x earlier) to factor in a) improving growth prospects in the Biosimilars/Vaccine space, b) building of a complex product pipeline like peptides, and c) enhanced business opportunity in the RoW market via entry into newer markets, increased penetration, and superior product lifecycle management. We arrive at our TP of INR3,280 and reiterate a Buy on the stock. The vaccine opportunity is the near term trigger to be factored in the earnings estimate.

Core markets/RoW/operating efficiency led earnings growth in 4QFY21

* Revenue grew 39.8% YoY to INR8.9b (est. INR8.6b) in 4QFY21, led by ~3x expansion in RoW sales to INR1.4b (16% of sales), 29.4% growth in core market sales to INR6.2b (70% of sales), and 15.3% growth in India revenue (14% of sales).

* Gross margin (GM) contracted ~390bp YoY to 55.9% due to changes in the product and geographic mix. EBITDA margin contracted at a lower rate (90bp YoY) to 36.9% due to lower employee cost/other expense (down 180bp/130bp as a percentage of sales).

* EBITDA was up 36.6% YoY to INR3.3b (est. INR2.7b).

* Adjusted PAT grew at a higher rate (~60% YoY) to INR2.6b (est. INR2.1b), aided by a lower tax rate in 4QFY21 v/s that in 4QFY20. Sales/EBITDA/adjusted PAT grew 31.5%/36.3%/29% YoY in FY21 to INR34.6b/INR13b/INR10b.

Highlights from the management interaction

* GLAND has purchased the assets of Vitane Biologics for INR900m. Further scale-up of this facility, integrating it with its drug production facility, and technology transfer would enable manufacture of 252m doses of Sputnik V vaccine over a one-year period.

* Through the near term vaccine opportunity, GLAND intends to build its capability as well as capacity in Biosimilars and enter the CDMO space.

* The share of RoW market has increased to 17% in 4QFY21 from 13% in 3Q, while the share of core markets remained stable QoQ. GM expanded 320bp QoQ, implying better realization in RoW markets.

* GLAND guided at a capex of INR3b/INR2b in FY22/FY23, with investment in the Pashamylaram, API, and Penems plants. This is in addition to the INR2.7b to be spent on building a Biosimilars facility.

Valuation and view

* We raise our FY22E/FY23E EPS estimate by 5%/4% to factor in: a) addition of newer markets/increased reach in the RoW segment, b) COVID-led Remdesivir business opportunity, and c) new launches in core markets.

* We expect 26% earnings CAGR over FY21-23E, led by 16%/21%/48% sales CAGR in core markets/India/RoW, aided by a 40bp margin expansion over FY21-23E.

* We value GLAND at P/E multiple of 31x to arrive at our TP of INR3,280. We remain positive on the stock on the back of: a) niche pipeline, b) enhanced offerings/adding newer geographies in the RoW segment, c) operating cost efficiency, d) consistent compliance, and e) enough war chest to tap inorganic opportunities. Reiterate BUY.

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