Uncertainty on revenue growth, margin outlook hits Gland Pharma stock

The stock of Gland Pharma dipped 14.6 per cent in trade on Thursday, reacting to downgrades by brokerages and downgrades in earnings estimates after a weak July-September quarter (second quarter, or Q2) performance and absence of clarity on near-term growth.

As the biggest loser in the BSE 200 Index on Thursday, the stock shed about a quarter of its value from its early September highs.

The immediate trigger for the bearish view of investors is the all-time low margins and worries on growth. Gross profit and operating profit margins slipped to their all-time lows at 50 per cent and 28.4 per cent, respectively.

Gross margins were down 60 basis points (bps) year-on-year (YoY) and 540 bps sequentially. The company indicated that the sequential impact was on the account of a change in the geographic mix and increased raw material costs.

Rest of the world (ROTW) and the Canadian markets were impacted by pricing pressures. A delay in supply led to lower volumes on some products. The company also took a one-time write-off of Rs 7-8 crore on one of its biologics products.

Operating profit margins also took a knock, falling 310 bps on a sequential basis and 643 bps YoY to 28.4 per cent. The drop was on account of falling operating leverage, with the share of employee and other costs rising 210-270 bps as a percentage of sales, observe analysts at Motilal Oswal Research.

Margins at the operating level have been witnessing a declining trend for at least six quarters. The injectable manufacturing company expects the margin pressure to persist due to cost pressures and negative operating leverage. It expects margins to be in the 30.5-31 per cent range in the second half of 2022-23 (FY23).

On the revenue front, there was sequential recovery. Sales were up 22 per cent quarter-on-quarter due to a 123 per cent increase in ROTW and an improvement in the supply of raw material. On a YoY basis, revenue declined 3.3 per cent, dragged down by the India market, where sales fell 42 per cent as the year-ago period had a high base of Covid-related sales.

Research analyst Mitesh Shah of Nirmal Bang Research expects revenue and net profit to grow about 10 per cent each during 2021-22 through 2024-25. While sales growth in the first half (H1) of FY23 was hit by supply-side issues, as well as a high base of Covid opportunities, especially in India, the brokerage expects product launches, particularly complex ones, as well as foray into contract development and manufacturing segment and China, to drive the company’s growth in the second half of FY23. The brokerage has a ‘buy’ rating on the stock, with a target price of Rs 2,582.

While there has been sequential improvement, some brokerages believe an uncertain growth outlook is a worry.

Alankar Garude and Samitinjoy Basak, analysts at Kotak Institutional Equities (KIE), say while the muted performance in the H1FY23 has been disappointing, lack of visibility regarding normalcy in sales and margins is a bigger worry.  

The company had guided for an 18-20 per cent growth for the past three quarters of FY23 and has now withdrawn its guidance, given volatile market conditions.

Lower-than-expected oncology sales and supply disruption are reasons furnished by the management for not meeting its FY23 guidance.

KIE has cut its target multiple to 22x, from 25x, after the Q2 showing and growth/margin concern. It has retained a ‘reduced’ rating, with a target price of Rs 1,975, as opposed to the earlier Rs 2,325.

While there is incessant selling pressure on the stock and valuations have corrected sharply, investors should await revenue and margin stability before considering the stock.