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Long road to recovery

Result Synopsis

Gland reported a weak quarter on back of declines in US and ROW revenues YoY as lack of customer offtake, still lingering supply concern and company opting margin over market share led to revenue shortfall. Gross and EBIDTA margin improved QoQ as a fallout of preference for margin vs market share; albeit management commentary of volume share being intact for top products appears out of sync with apparent preference for margin.

Gland outlined several moving parts heading into Q4 and FY24 – inventory rationalization at customer end, supply chain leading to production delays and competition leading to price erosion. While Heparin issue could get relief once second supplier is approved, price erosion could continue to manifest itself in the form of lower profit share and, eventually, revenue impact with a lag. We cut FY23 estimates as US revenues continue to disappoint with a now revised expectation for a decline of 4% vs earlier forecast of ~8% growth; similarly, FY24 outlook also gets reset for US and other geographies from 15/20% to 10-15% while margin at ~30-31% remains largely unchanged. We expect another lackluster quarter in Q4 with traction in US being back ended in FY24. We also take this opportunity to introduce FY25 estimates and roll over target multiple. Given the expectation of growth disappointment, lack of near term triggers and a subpar acquisition in the form of Cenexi, lower target PE to 25x from 35x earlier and assign revised TP Rs1,720 (earlier Rs3,060). Our numbers do not include Cenexi as we await additional metrics though prima facie Cenexi is margin dilutive and would not swing the needle either way

Result Highlights

* Gland Pharma reported a weak topline with revenues down 10% QoQ and 12% YoY vs expectation of 2% YoY growth

* US sales down 14% QoQ and 13% YoY due to price erosion and supply chain issues leading to production delays

* ROW sales were surprisingly 13% lower QoQ while India continued to rebound QoQ at Rs814mn vs Rs726mn in Q2

* Despite a weak revenue quarter, gross margin improved to 54.5% and margin improved to 31% though there were 150bps one-off in Q2, which still leads to ~100bps margin gain QoQ

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