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Complex products/newer markets to fortify growth pace

Progressing well on scaling up manufacturing of the vaccine

* GLAND’s 1QFY22 performance was ahead of our expectation, led by robust revenue growth across all geographies. It is progressing well on scaling up manufacturing of the COVID-19 vaccine. It is concurrently developing products/undertaking capex related to complex product as well as enhancing its geographical diversification.

* We raise our FY22E/FY23E EPS estimate by 8% each to factor in: a) increased reach as well as penetration in the RoW/India markets, b) better outlook for the US market, c) higher offtake of Remdesivir/Enoxaparin, and d) continued manufacturing efficiency driving better operating leverage. We value GLAND at 35x its 12 months forward earnings to arrive at our TP of INR4,460.

* We remain positive on GLAND due to its: a) superior ramp-up in existing products, b) healthy build-up in the complex product pipeline, c) ongoing investment in the vaccine/Biological space, and d) enough scope for inorganic growth as well. We reiterate our Buy rating.

Strong beat on earnings led by superior revenue growth

* Revenue grew 31% YoY to INR11.5b (est: INR9.9b) in 1QFY22.

* India/RoW sales rose 77%/51% YoY to INR2.3b/INR2.2b (20%/19% of sales). Sales in core markets grew 16% YoY to INR7b (61% of sales).

* Gross margin contracted by ~1,030bp YoY to 53.5% as 1QFY21 had benefitted from niche launches. GM fell 240bp QoQ due to changes in the geographic mix.

* EBITDA margin decreased at a lower rate (890bp YoY) to 37.8% (est. 37.1%) due to better operating leverage (employee cost/other expenses fell 120bp YoY/30bp YoY as a percentage of sales). In fact, EBITDA margin expanded 90bp on a QoQ basis.

* EBITDA was up 6% YoY to INR4.4b (est. INR3.7b)

* Adjusted PAT grew at a higher rate (~12% YoY) to INR3.5b (est. INR2.8b), aided by higher other income.

Highlights from the management commentary

* GLAND expects US sales to grow by 18-20% YoY in FY22.

* It is working on 14 complex products, of which two/three will be filed in FY22/FY23. It is developing 25-30 complex products over the next 2-3 years.

* The management indicated a capex of INR5.7b for FY22, of which INR3b is to be spent on the vaccine facility (INR1.2b spent till date). It has guided at an overall capex of INR3.5b in FY23.

* The management expects to sustain fixed asset turn at 3.5-3.6x, including the upcoming investments in the Biological segments.

* It has signed a contract with Hetero for the Sputnik vaccine. Trial batches of the same were completed recently. Manufacturing would start from Sep’21.

Valuation and view

* We raise our FY22E/FY23E EPS estimate by 8% each to factor in: a) faster growth in core markets in FY22, b) geographical expansion and new product launches in RoW markets, and c) operating leverage, especially in RoW markets.

* We expect 35% earnings CAGR over FY21-23E, led by 18%/44%/48% sales CAGR in its core markets/India/RoW and a 40bp margin expansion.

* We value GLAND at 35x its 12 months forward earnings to arrive at our TP of INR4,460. We remain positive on GLAND on the back of: a) continued growth momentum in core markets, b) increasing reach and expanding product portfolio for the RoW segment, c) product pipeline build-up for the Chinese market, d) consistent compliance, and e) an adequate war chest to tap inorganic opportunities. We reiterate our BUY rating.

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