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India and ROW hurt earnings

Work in progress for product pipeline/newer markets/streamlining operations

* Gland Pharma (GLAND) delivered weak 1QFY23 result due to multiple headwinds such as supply constraints of certain ancillary materials, plant modification-led lower production and reduced scope of business for certain products in the Indian market. While syringe-related hurdle is addressed, GLAND is working towards resolving other ancillary materials’ availability.

* We cut our EPS estimates by 14%/16% for FY23/FY24 to factor in: a) prolonged supply chain-related issues, b) slowdown in India business, c) and higher opex. We value GLAND at 33x 12M forward earnings to arrive at our TP of INR3,000. There are operational hurdles over the near term. However, given product pipeline of complex injectables, consistent compliance track record, biologics-led additional growth lever and surplus cash for any inorganic opportunity, we believe GLAND’s business model remains intact for better growth prospects over the next three years. Maintain BUY.

Geography mix benefit offset by reduced operating leverage

* GLAND’s 1QFY23 sales declined 26% YoY to INR8.6b (our est: INR9.9b).

* India sales plunged 72% YoY to INR510m (6% of sales), RoW sales declined 55% YoY to INR1b (12% of sales) and Core market sales dropped 6% YoY to INR7b (82% of sales).

* Gross margin (GM) expanded 280bp YoY to 56.3% due to geography mix.

* However, EBITDA margin contracted 630bp YoY to 31.8% (our estimate: 31.3%) led by inferior operating leverage.

* As a result, EBITDA declined 38% YoY to INR2.7b (our est: INR3.1b).

* Adj. PAT dipped ~35% YoY to INR2.3b (our estimate: INR2.6b).

Highlights from the management commentary

* GLAND faced challenging 1QFY23 on account of: a) COVID-led high base of past year, b) supply constraints related to syringes, c) higher logistics/power cost, d) reduced scope of business for certain products in India and d) shutdown of Insulin Line for modification purpose.

* Syringe supply is projected to be normalized by Sep’22, while Heparin supply issue is yet to be sorted out

* COVID-led sales was INR700-800m in 1QFY22; but production disruption led to loss of sales of ~INR300-400m for 1QFY23

* Syringe supply issues resulted in loss of INR250m sales in the US for 1QFY23

* GLAND has robust order book for the RoW market, providing good business visibility in the coming quarters

* Approvals of two products in China are expected by 3Q/4Q of FY23.

* The operational costs for the biologics facility are about INR150m per quarter currently.

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