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A forgettable quarter; all eyes on revenue recovery

Result Synopsis

Company expects rest of the fiscal to show improvement in growth of high teens over last year. We note that so far demand is holding up well as volumes in several key molecules is up sharply YoY even as impact of price erosion is fairly small at 1% for Gland for a say 10% decline at the front end. US business does appear to have bottomed out with 6% QoQ growth and with most of the syringe shortages taken care of by end of quarter, expect a much better US outlook for rest of the fiscal and indeed FY24. An estimated shortfall of Rs4-5bn in revenues in current fiscal would largely be on back of ROW + India deficit which may not be recouped leading to earnings cut in FY23/24. We now expect a revenue decline in current fiscal vs ~20% growth earlier though contract-based business in ROW would mean Gland would quickly recover its footing in those markets (Brazil & other better regulated markets might take time, hence we expect FY23 run rate below last year) translating in to a rebound next year. US business is expected to clock ~10% growth followed by a ~20% rise on current low base. Our assumptions of growth have not shifted primarily as we reckon revenue declines still appears a function of component shortages and not any underlying change in demand pattern/competitive intensity (indicated by just 1% price erosion impact in an environment front-end generic company reporting double digit pricing pressure overall). Such a shortfall also suggests less of a need to cut PE multiple especially as FY24-25 growth expectations may not have changed materially. We cut FY23 and FY24 EPS by 24% & 22% respectively in lieu of revenue shortfall outlined above but retain 35x on FY24 earnings translating in to revised TP Rs3,050 (earlier Rs4,000); expect consensus EPS cuts too of similar nature. Till revenue growth certainty returns, reckon FY23 would be a low growth year at best leading to back ended stock returns and prompting us to remove Gland as one of the top picks in the sector.

Result Highlights

• Revenue down 25.7% YoY to Rs 8,569mn, below our estimates of -11% YoY

• US fell by 6% YoY and 1% QoQ. Sale to US market is comprising of products sold to both US customers and Indian customers for US markets. For Q1FY23 sale to US customers was Rs5.5bn and to Indian customers for US markets was Rs870mn resulting in +6% growth QoQ and -4% YoY

• India revenue declined 72% YoY, India B2B sales were impacted due to planned shutdown of Insulin line during the quarter and higher sales of COVID drugs like Remdesivir and Enoxaparin last year

• RoW fell 26% YoY attributed to delay in input material supplies which has impacted ability to take up orders

• EBITDA Margins for the quarter were lower by 631bps YoY and flattish QoQ despite RM costs easing in the current quarter, lower revenue affected margins.

• The total R&D expense for Q1FY23 was ?410 million which is 4.8% of revenue.

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