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Improvising the base; adding new avenues for growth

* Following our Initiating Coverage on Mankind Pharma (MANKIND), we have highlighted certain key aspects from the recently released annual report.

* MANKIND has a strategic roadmap for growth through expansion in high entry barrier innovative product launches in the chronic/consumer segment and other adjacencies, transitioning from sexual wellness to consumer wellness in the over-thecounter (OTC) space.

* During FY22-24, its strategic product launches have focused on chronic therapies such as diabetes, cardiac, gynecology, CNS, and respiratory.

* Further, it is implementing efforts to deepen its presence in Tier I/ metro cities by engaging with key opinion leaders and forging strategic partnerships with hospitals. ? In addition to premiumizing products and extensions, MANKIND is expanding in the consumer wellness segment via product launches such as Nimulid.

* Due to growth initiatives through both organic and inorganic means, the FCFE and return ratios have been impacted from FY20 to FY24. However, the CFO/ EBITDA ratio improved to ~89% during FY24. However, we anticipate an improvement in FCFE during FY24-FY26, with the increased benefits of initiatives implemented over FY22-FY24.

* Overall, we expect a 14% earnings CAGR over FY24-26, fueled by an 11% sales CAGR and a 180bp margin expansion. We value MANKIND at 42x 12m forward earnings to arrive at our TP of INR2,760. Reiterate BUY.

Enhancing the specialty portfolio; adding new growth levers

* Over the past few years, MANKIND has consistently implemented efforts to launch differentiated products and improve market diversification. It has utilized the inorganic/in-licensing routes as well, given its established presence in the domestic formulation (DF) market.

* Accordingly, products such as Daffy, Air Space, Ecitelo, Ovaflo-Q10, SGLTD-S, Sitaday, Pizowave, and Combihale have shown phenomenal traction postlaunch. The unique nature of products and strong marketing efforts of MANKIND have propelled sales for these products and led to a strong traction in the base portfolio.

* MANKIND is gradually investing in building the a) NCE pipeline, b) biosimilar portfolio, c) pet-food portfolio, and d) Ayurveda portfolio, thereby adding newer growth levers over the long term.

Multiple initiatives to underpin sustained growth visibility

* MANKIND has improved its share of chronic therapies in the prescription (Rx) from 20.4% in FY15 to 35.5% in FY24.

* Adding specialized divisions, expanding presence in the new chronic therapies, and in-licensing/M&A opportunities resulted in higher traction from products in chronic therapies. Further, MANKIND continues to focus on improving its presence across Tier I and metro cities.

* On the consumer healthcare front, management expects double-digit growth led by new launches and SKUs, alternate channels, and premiumization of brands.

* For both Rx and consumer health, MANKIND has spent around INR20.7b in advertisement and sales promotion expenses over FY20-24 registered a 24% CAGR (5.3% of sales).

Adding another differentiated asset to the portfolio through BSV

* With the acquisition of BSV, MANKIND has gained wider access to the high entry barrier super specialty portfolio and alternate channel of distribution. This also provides a specialty R&D tech platform, in-house complex manufacturing capabilities and a strong institutional reach. It has gained access to the new geographies in EMs.

* BSV has a strong presence in women healthcare/infertility/critical care segments. Particularly, anti-D, Thymogam and ASVS have no peers. Other top products also do not have more than three competitors.

* The wider coverage of doctors and presence in international markets drive strong growth momentum in this business.

Scale up of acquired units/improved capacity utilization to drive better FCFE/ROE

* During FY20-23, the RoE declined 11% due to: a) the acquisition of two products from DRRD and the acquisition of Panacea Biotec, b) pending utilization improvements for the new capacity for dydrogesteron facility at Udaipur, and c) higher depreciation related to Udaipur facility.

* In FY24, RoE improved due to growth in EBIT margin supported by declining tax expenses.

* Over FY20-23, the CFO rose to INR18.1b from INR10.7b. Further, the CFO/ EBITDA ratio improved to ~89% from 70% over the same period. However, FCFE generation declined to INR2.9b from INR6.9b over the same period due to aggressive investments in capex and acquisitions.

* After the acquisition of Panacea Biotech (PB) in CY22, MANKIND continues to scale up this business. PB recorded 20-25% YoY revenue growth in 1QFY25.

* The acquisition of BSV is expected to impact FCFE/return ratios in the near term.

* The company’s superior execution track record and additional synergies from the acquired portfolio provide visibility for better FCFE/ROE in long term.

Reiterate BUY

* Overall, we expect a 14% earnings CAGR over FY24-26, fueled by an 11% sales CAGR and a 180bp margin expansion.

* Considering a) the expansion in product offerings in major therapies, b) the capitalization on leverage, c) a further improvement in the share of chronic therapies, d) the scale up of more brands to the INR500m-INR1b bracket, e) improvement in the MR productivity, and f) footprint expansion in metro/Tier-I cities, we assign a multiple of 42x on 12M forward earnings to arrive at our TP of INR2,760. Reiterate BUY.

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