Upper-teens EPS growth likely for Gland Pharma in next two financial years

Gland Pharma beat muted expectations for Q2FY25. There was increased Ebitda (Earnings before interest, taxes, depreciation and amortisation) loss at Cenexi, the CRAM subsidiary. However, overall Ebitda margin was better than expectations at 21.1 per cent. But given two years of earnings decline in FY23 and FY24, the business may have bottomed and upper-teens EPS (earnings per share) growth looks possible over next two financial years.

 

Analysts are downgrading optimistic EPS estimates for FY25 and FY26, due to continuing slowdown in US sales and a temporary issue at Cenexi’s site in Belgium. Uptick in the biologics business was also slow. But H2FY25 onwards, there’s hope for better volumes for base products like Enoxaparin, Ebitda break-even for Cenexi, and better business in biologics.

 

Gland’s Q2FY25 revenues grew 2.4 per cent year-on-year (Y-o-Y) to Rs 1,400 crore and ex-Cenexi, revenues grew 5 per cent Y-o-Y to Rs 1,070 crore for the quarter. Core sales grew 3.2 per cent Y-o-Y to Rs 1,050 crore (75 per cent of sales). The rest-of-the-world (ROW) sales were flat Y-o-Y at Rs 270 crore (19 per cent of sales). India sales were flat on a Y-o-Y basis at Rs 87.4 crore (6 per cent of sales). 

 

The gross margin contracted 240-bp Y-o-Y to 59.1 per cent due to changes in product mix. The Ebitda margin contracted 250-bp Y-o-Y to 21.1 per cent due to higher employee costs (up 130-bp Y-o-Y as per cent of sales). But on ex-Cenexi basis, the Ebitda margin was 34.2 per cent (flat Y-o-Y and up 520-bp quarter-on-quarter). Ebitda declined 8.3 per cent Y-o-Y to Rs 300 crore. Adjusted PAT (profit after tax) declined 16 per cent Y-o-Y to Rs 160 crore due to higher tax outgo.

 

In H1FY25, revenue grew 8.7 per cent Y-o-Y to Rs 2,800 crore while Ebitda and PAT declined 9.2 per cent and 20.8 per cent Y-o-Y to Rs 560 crore and Rs 300 crore, respectively. Revenue may be flat in H2FY25 but Ebitda and PAT could improve by 40-50 per cent. Ex-Cenexi, Gland grew 15 per cent Y-o-Y to Rs 1,630 crore in H1. There was volume growth in key injectables, and new product launches. Contribution from new products for H1FY25 was Rs 60 crore.

 

In H1FY25, Gland filed 15 ANDAs (abbreviated new drug applications). It received approvals and launched 15 products. There is interest in the biologics space for advanced-stage CDMO (Contract Development and Manufacturing Organisation) contracts in monoclonal antibodies and novel plasma-based proteins.

 

The management guided for low double-digit Y-o-Y growth in core markets for FY25. Ebitda break-even for Cenexi by Q4FY25 is expected. There is a new biologics agreement with Dr Reddy’s. Four molecules were launched in the US market. Gland has signed contracts related to GLP-1 products for regulated markets with three companies.

 

Potential pick-up in US sales could come from additional contracts of Enoxaparin, new launches, etc. A new ampoule line will be commissioned in January 2025. Four of the nine products planned for the Chinese markets are currently under development, and five have received approvals.

 

Double-digit sales CAGR is possible in the base business over FY25-27. Cenexi may grow at 8.5 per cent over FY25-27. Over FY25-27, ROW sales may see mid-high teens CAGR. In H1FY25, the ROW market witnessed 2.5 per cent Y-o-Y decline to Rs 540 crore, with delays in tender procurements by partners. Gland registered Ziprasidone, Furosemide, Deferoxamine, and Dexmedetomidine in new geographies.

 

Analysts are divided on the stock. Buy, Sell and Hold recommendations are all coming from reputed securities analysts. The target prices range from Rs 1,450 to Rs 1,970.