Motilal Oswal maintains a buy call on stock of Gland Pharma Ltd. for a target price of Rs 2,470 apiece. The stock can rise 40% from its current level in 12 months, according to the brokerage's given target price. It is a mid-cap pharmaceuticals sector company having a market cap of Rs 29,308.78 crore. The company manufactures and markets small-volume parenteral solutions. Gland Pharma conducts its business worldwide, with a global footprint across 60 countries, including the United States, Canada, Europe, Australia, India and other markets.
Stock Outlook & Returns
The current market price (CMP) of the Gland Pharma stock stood at Rs 1,776 apiece on NSE. 5.23% down from its previous close. The stock is trading near its 52 week low, around 7.08% up from its 52 week low. The stock touched a 52-week low at Rs 918 recently on 10 November 2022. While its 52-week high is Rs 4,062.95 recorded on 6 January 2022.
In the past 1 week, the stock surged, giving a 4.65% positive return. Whereas in the past 1 and 3 months, it has fallen by 4.92% and 24.85%, respectively. Over the past 1 year, it has fallen 50.36%. The stock made its debut on NSE on 20 November 2020, and since its listing, it has given 2.19% negative returns.
Acquisition to drive reach/development capabilities
Gland Pharma (GLAND) entered into a Put agreement to acquire Cenexi group (Cenexi), thereby enhancing its CDMO offerings in the Europe market. The acquisition would also provide the company with the technical know-how in sterile forms, including ophthalmic gel, needleless injectors, and hormones. The EV/sales is about ~1.2x CY21/CY22E. The EV/EBITDA is about 10x CY21 and 8x CY22E. This is in line with generics business valuation. While we raise our EPS estimate by 3% for FY24 to factor in additional business due to acquisition, we note that the acquisition is margin dilutive. Also, the return ratios of Cenexi (post acquisition) for CY22E would be much lower than GLAND's.
Cenexi is engaged in Contract development and manufacturing (CDMO) business with expertise in sterile liquid and lypholized fill-finished drug, including capabilities in oncology and complex products. About 56%/24%/4% of the revenue is from Europe, ROW, and Asia, respectively. About 41% of the revenue is from ampoules, while 13%/14% of the revenue is from vials/pre-filled syringes (PFS), respectively. It has presence across the development and formulation manufacturing aspect within the CDMO space. It has four manufacturing facilities (three in France/one in Belgium). The major business of Ampoules is manufactured at Fontenay. While the Herouville/Braine site has capabilities to manufacture vials/PFS, the Osny site has the capability to manufacture hi-potent solids. The revenue for CY21/1HCY22 stands at EURO184m/EURO100m and EBITDA margin stands at 12.5%/19%, respectively. The company's gross block stands at EUR90m.
Acquisition to strengthen prospects in the EU market...
Considering the need for local presence to gain business in European markets, this acquisition would help GLAND strengthen its business prospects in these markets. Also, given that Cenexi has capabilities in processing substances such as hormones, suspensions, and controlled substances, it would expand the GLAND's overall offerings to its customers.
...but would adversely impact the overall profitability
EBITDA margin has improved to 19% in 1HCY22 from 9.7% in CY19. However, management indicated that 1HCY22 margins are not the normalized rate of EBITDA margin. Also, it remains lower than GLAND EBITDA margin of 31.5% for 1HCY22. Management intends to increase the profitability of Cenexi by improving operational efficiency at the Fontenay site, accelerating technology transfers, shifting some of the products to the GLAND site from Cenexi, and adding capacities at its existing Cenexi sites.
Valuation and view
Considering equity value/enterprise value of EUR120m/EUR230m, respectively, the EV/sales is about ~1.2x CY21/CY22E. The EV/EBITDA is about 10x CY21 and 8x CY22E. Given the generics product portfolio, the valuation is fair and in line with peers in the space. "We raise our FY24 EPS estimate by 3% to factor in additional business from Cenex. The ROE of the business is expected to be at 10% on our assumption of CY22E sales/EBITDA/PAT of EUR190m/EUR28m/EUR12m, respectively. This return ratio is much lower than GLAND's ROE of 16%. Accordingly, we reduce the PE multiple to 28x from 31x on a 12-month forward earnings basis to arrive at a price target of INR2,470. Also, the sharp correction over the past six months has made valuation attractive at 21x/18x FY24/FY25 earnings, respectively. Given the gradual improvement in the core business, we reiterate our Buy rating on GLAND," the brokerage has said.
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