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A pure play formulation CDMO company, at an attractive valuations

With a revenue market share of 1.5%, Windlas Biotech Ltd. (WBL) is among the top-five contract development & manufacturing organization (CDMO) in the domestic pharma sector. It serves seven out of top-10 pharma formulation companies in India. The company focuses on therapeutic areas like cardiovascular, anti-diabetics, neurology, gastrointestinal, vitamins, minerals, nutrients etc. WBL operated in three verticals, namely, the CDMO services & products, the Domestic trade generics & OTC brands and the Exports segment. In FY22, these verticals generated 82.3%, 13.2% and 4.5%, respectively, to the total business from the sales of products.

Investment rationale:

• Structural tailwind for the CDMO companies

• Consistent focus on high-margin chronic therapeutic areasto aids business sustainability

• CDMO vertical business to fall back in the growth trajectory

• Other business verticals offers huge growth potential with superior profitability

• Synergy across the business verticals

• Anticipating an operating margin expansion by 2ppts over FY22-24E

Risk and concerns:

• Unfavorable government policies and regulations

• Continued subdued capacity utilization

• Difficulty in adding new customers and brands

• Lower than expected growth across the verticals

• Competition

Valuation:

WBL came out with an IPO (in Aug. 2021) and demanded a P/E valuation of 26.6x (to its restated FY21 EPS of Rs. 17.3). The issue was fully priced and since its listing, the share price is in a downward trend.

At CMP of Rs. 222.4, WBL’s share is trading at a TTM P/E multiple of 12x (to its TTM EPS of Rs. 17.5), which seems to be attractive considering the growth outlook and return profile. Thus, we assign a “BUY” rating on the stock with a target price of Rs. 289.4 per share.

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