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Cenexi disappoints

Q3FY24 margins miss on poor performance by Cenexi

Gland Pharma’s (GLAND IN) Q3 revenue came in 2% ahead of our estimate, but EBITDA missed by 6% due to poor margin performance by the recently-acquired Cenexi subsidiary in France. PAT missed our estimate by 21% due to higher depreciation and tax rate. EBITDA margin for the Legacy business was ~34%, better than our expectations, and offset partly the poor show at Cenexi.       

Cenexi – A case of capital mis-allocation?

Cenexi was projected to be a business yielding 9-10% EBITDA margin, when acquired. However, it has posted EBITDA losses in the past two quarters that saw full consolidation. Also, management commentary does not entail any major pick-up in the near-term either. Thus, in hindsight, the acquisition seems to be a case of capital mis-allocation.

Legacy business recovers fully

EBITDA margin for GLAND’s legacy business has now fully recovered from the interim pressure to the historic levels of ~34%. Management commentary suggests that this level is maintainable for the foreseeable future. Growth in the legacy business is also picking up, though we expect it to stabilize at low double-digits and not go back to twenties that the company delivered in FY18-22.

Upcycle in US generics could continue to help

With a large, expanding product basket of injectables, GLAND is well-positioned to capitalize on the pricing upcycle that we are seeing in the US generics market. We believe that this macro tailwind will likely sustain for the next 2-3 years.

Valuations: Maintain Accumulate; TP raised to INR 2,057

We lower our FY24E core EPS by 9%, but maintain FY25E/26E core EPS estimates. GLAND trades at 32.9x FY25E core EPS. High valuation does limit the upside. We raise TP from INR 1,764 to INR 2,057, which is 31x FY26E core EPS plus cash per share. Any reversal in the business momentum in the developed markets is the key risk.

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