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Concord Biotech Limited is a R&D driven biopharma company that manufactures API through fermentation & semisynthetic process and finished formulations. Founded in the year 2000, the company has transformed from a singleproduct company to a broad-spectrum solution provider, offering products across diversified therapeutic segments. Concord is globally known for its products and has a presence in more than 70 countries worldwide with efficient distribution infrastructure in markets like the USA, Europe, Japan, Latin America, Africa, Asia, besides significant presence in Indian market. Concord is actively expanding its horizons by partnering with leading global pharmaceutical companies by meeting their product development needs for APIs & finished formulations.

Investment Rationale

* Market Leadership in differentiated API offerings: Concord has one of the widest range of small molecule fermentationbased immunosuppressant APIs and is also one of the leading global developers and manufacturers of immunosuppressants and oncology APIs. The company’s strength lies in its focused niche fermentation API’s which is backwardly integrated to KSM. It commands a market share of over 20% (by volume) across key identified fermentation?based API products. It is also one of the very few companies with a presence in all the key regions, including the US, Europe, and Japan. Future growth of the fermentation based API segment will be led by market share gains due to increasing the wallet share from existing API customers and new client addition; and expansion of API portfolio in the lowvolume high value segment. We estimate the API segment to register robust CAGR of 14.8% between FY23-26E.

* Significant entry barriers creating competitive edge: Fermentation API business has significant entry barriers due to: 1) Requirement of technical capabilities: The Fermentation as a core component of manufacturing process presents unique challenges. It involves the intricate management of microbial strains, the precise control of multiple interconnected processes, and the execution of various purification steps. Hence, this approach stands in stark contrast to chemical synthesis, requiring a highly specific, scientific, and quality-centric approach; 2) Long gestation period: It takes around 6 to 7 years to develop the molecule in the fermentation space; 3) In addition, there is substantial capital investment into infrastructure such as large scale fermenters, effluent treatment facilities and disposal of biologically hazardous waste. Concord has over the year’s built a portfolio of 23 fermentation APIs, scaled manufacturing capabilities and backwardly integrated its API to KSM creating a competitive edge in the industry.

* Completion of significant capex towards large manufacturing capacities provides growth opportunities: Between FY20- 23, the company incurred an aggregate capex of Rs. 6.6bn towards capacity expansion viz. 1) New API facility (Unit 3) at Limbasi, Gujarat with a capacity of 800 cu. mtr.; 2) Expansion of Formulation facility (Unit 2) at Valthera, Gujarat from 523mn units to 802mn units; and 3) New injectable line at Unit 2. We understand the significant capex is completed and there may not be major investment in capacities in next couple of years. We expect the company to reap benefits of the huge capacity and improve its utilisation going forward. We estimate the company to generate FCFF of Rs. ~8.5bn between FY24E-26E and improve its ROIC by 600-700bps.

* Outlook & Valuation: We are optimistic on Concord Biotech due to: 1) Fermentation APIs gaining market share with expansion of API portfolio in the low-volume high value segment; 2) Formulations segment picking-up on the back of new launches and the addition of injectables portfolio; 3) Ready capacities and low utilization levels providing opportunities for operating leverage and margin expansion; and 4) Completion of significant capex to result in FCFF generation. We estimate FY23-26E Revenue/EBITDA/PAT CAGR of 21.4%/26%/27.5%. We value the stock at 36x FY26E EPS to arrive at a target price of Rs.1,715 and initiate our coverage with an OUTPERFORM rating on the stock

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