Buy Mankind Pharma Ltd for the Target Rs.2,990 by Motilal Oswal Financial Services Ltd
Cost headwinds lead to earnings miss
Rx-recovery/consumer traction/financial deleverage to support earnings in FY27
* Mankind Pharma (Mankind) reported in-line revenue in 1QFY26. However, EBITDA/PAT came in 5%/7% below our estimates. Higher operational costs at the start of the financial year, coupled with increased interest costs and depreciation, affected earnings for the quarter.
* After the implementation of corrective measures in the prescription (Rx) segment of the domestic formulation (DF) category over the past two years, the benefits are now visible to some extent, with Mankind outpacing industry growth in Rx in 1QFY26.
* Notably, Mankind outperformed the industry in volume, along with superior growth in chronic therapies.
* With a focus on modern trade (MT) and ecom, Mankind was able to deliver healthy growth in the consumer segment.
* After strong 35% YoY growth in the base export segment in FY25, Mankind delivered moderate single-digit YoY growth in 1QFY26.
* The company is working on improving growth prospects of BSV by widening its reach and expanding manufacturing capacity.
* We reduce our earnings estimates by 6% each for FY26/FY27, factoring in a) increased operational costs to improve its chronic therapies franchise, b) promotional spending on new launches in the consumer health segment, and c) a gradual reduction in interest outgo. We value Mankind at 45x 12M forward earnings to arrive at a TP of INR2,990.
* Considering the moderation in overall industry growth in the prescription segment, Mankind has proactively recalibrated its efforts to outpace the industry and deliver sustainable growth going forward. Mankind may see an earnings decline. However, the scale-up in BSV operations, market share gains in Rx, utilization of multiple distribution channels for consumer health products, and lower financial leverage should put Mankind back on the growth path from FY27 onward. Maintain BUY.
Revenue and profitability miss estimates
* Sales grew 23.4% YoY to INR35.7b (est. INR35.6b). DF revenue (87% of sales) rose 19% YoY to INR31b. Rx (92% of DF sales) grew 17.5% YoY to INR28.5b, supported by improved base business growth and addition of BSV portfolio.
* Consumer business (8% of domestic sales) grew 15% YoY to INR2.5b.
* Exports (13% of sales) grew 81.1% YoY to INR4.7b, primarily due to consolidation of BSV supported by growth in base business.
* Gross margin contracted by 140bp to 70.5% due to increased raw material costs for the company.
* EBITDA margin contracted 130bp YoY to 24% owing to higher raw material costs, while opex remained stable YoY as % of sales.
* Accordingly, EBITDA grew 17% YoY to INR8.5b (our estimates of INR8.9b). ? PAT declined 24% YoY to INR4.3b (our est: INR4.6b).
Highlights from the management commentary
* Mankind maintained its EBITDA margin guidance of 25-26% for FY26.
* It expects BSV YoY sales growth of 18-20% and EBITDA margin of 26-28% in FY26. YoY BSV sales were stable in 1QFY26.
* The company plans to invest INR1.5-2b in setting up a biologic facility at Baroda to scale up its BSV business.
* Mankind highlighted that organic growth would be 10% YoY for the quarter. This implies BSV sales of INR4b for the quarter.
* The company also noted that international base business grew in single digits in 1Q. Assuming it to be 8%, BSV exports would be INR1.9b for the quarter.
* Mankind expects to pay debt of INR20b in FY26. INR5b was paid in 1Q.
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