Strong industry dynamics and diversified revenue base should support Neuland Laboratories Limited

Neuland Laboratories Limited developed qualified sources from India, Europe and US so that multiple sources can help make supply chain sustainable and reduce dependency on China. The company continues to work to shorten supply chain and develop geographically closer sources. Neuland Laboratories Limited is committed to price discovery and increasing visibility through digitisation of supply chain. It will continue to de-risk supply chain by qualifying two or more vendors for KSMs.

Neuland Laboratories Limited

Company profile

Neuland Laboratories Limited was established in 1984 and it is a publicly listed company, having its headquarters in Hyderabad, India. The company has been categorised as a leading manufacturer of active pharmaceutical ingredients (APIs) and an end-to-end solution provider for pharmaceutical industry’s chemistry needs.

For more than 3 decades, the company has been at forefront of facilitating and accelerating drug development and cGMP manufacturing of APIs. Its technical and scientific teams offer comprehensive solutions and services to global pharmaceutical industry.

Target markets of Neuland Laboratories Limited

The company enjoys presence in more than 80 countries with over 75% of its revenues coming from exports. US and Europe are key markets of the company, as they account for 79% of total exports.

Neuland Laboratories Limited has now filed 62 DMFs with USFDA, more than 495 DMFs in Europe, and many more with several health authorities in Canada, Japan, Korea and Australia.

Business model of Neuland Laboratories Limited

The company offers solutions across full range of pharmaceutical industry’s chemistry requirements, from synthesis of library compounds to supplying NCEs and advanced intermediates at numerous stages in clinical life-cycle, and commercial launch. Strength of the company is its expertise in manufacturing of APIs and advanced intermediates from US FDA approved facilities. Core competency lies in application of strong process chemistry to manufacturing in a regulatory compliant environment, supported by strong, well-qualified team.

Financial performance

Neuland Laboratories Limited was able to cross several significant milestones in FY23 with business supported by ongoing growth in high margin Specialty and CMS (Custom Manufacturing Solutions) business. Performance in FY23 exhibits numerous initiatives it has taken in line with its strategy over past few years. Such initiatives are now playing out. The company believes that this puts it in a strong position as it looks to consolidate healthy momentum going forward.

The company’s focus on R&D and project management helped it in achieving its highest ever profitability margins in FY23. It executed several CMS projects during FY23 resulting in business recording significant growth and contributing nearly half of Q4 revenues. The company expects this momentum to continue on account of new customers increasingly accepting Neuland as an established CDMO.

The company’s total income saw a growth of 61.8% to INR415.1 Crore in 4Q23, while its EBITDA grew by 224.8% to INR127.8 Crore. Its PAT grew 287.2% year-over-year in 4Q23 to INR84.5 Crore, with its PAT coming at 20.4%.

In FY22, the company’s revenue remained flattish at INR953.2 Crores against INR953 Crores in FY21, led by logistics issues and sharp increases in manpower costs and other expenses related to commercialisation of Unit-3. Its EBIDTA de-grew 11.2% to INR144.3 Crores in FY22 compared to INR162.5 Crores in FY21.

PAT of the company further declined by 20.9% as a result of higher depreciation on account of Unit-3 commercialisation to INR63.5 Crores in FY22 against INR80.3 Crores in FY21. Capex of the company came in at ~INR96 Crores. Despite making capital investments, its net gearing ratio remained low at 0.3x. Its ROCE was 8.55%, lower than last year’s 11.93%. However, the company expects significant improvement in ROCE as Unit-III ramps up.

Industry analysis

COVID-19 pandemic induced crisis had long-lasting impact on global public health, highlighting resilience of global health systems with quicker adaption to peaks in demand. Total cumulative spending on COVID-19 vaccines through 2026 should touch $251 billion, largely focused on initial wave of vaccinations. Global medicine market excluding COVID-19 vaccines should be able to compound at ~3-6% to reach $1.8 trillion by 2026. Market continues to be dominated by top 10 developed countries. US was largest region in global medicine market followed by China and Germany. In developed countries, quicker adoption of new treatments, offset by patent lifecycles and competition from generics and biosimilars should continue as main factors influencing medicine spending and growth. In pharmerging countries, substantial increase in healthcare access was a driver of change. Increasingly, led by China, pharmerging countries continue to enable access to newer medicines developed by MNCs, often earlier and with access to more of their populations. India was a key driver of growth in global markets as country has seen higher growth-rates.

Indian healthcare sector has been categorised as a well-developed one with a globally renowned pool of scientists and engineers. Size of Indian pharmaceutical market came in at $44.3 billion in FY22. India has been named as a largest provider of generic drugs and as a third largest producer of pharmaceutical by volume and was 7^th largest market by value. Pharma industry saw a significant rise in past 3 years with rapid digitisation and advanced research in this field has opened paths for newer avenues of treatment. Experts believe that domestic market should grow 3x in next decade. Domestic pharmaceutical market is projected to reach $65 billion by FY24 and $120-130 billion by FY30. This industry should be able to foster a culture of R&D and innovation to enable rapid drug discovery and development to improve health outcomes on a global basis.

Indian government continues to support Indian healthcare sector. Under Union Budget FY21-FY22, Ministry of Health and Family Welfare was given INR73,932 crore and Department of Health Research was given INR2,663 crore. Government gave INR37,130 crore to 'National Health Mission’. PM Aatmanirbhar Swasth Bharat Yojana was given INR64,180 crore over 6 years. Indian active pharmaceutical ingredients (APIs) market was pegged at $11.8 billion in FY21. Growth stemmed from high growth of biopharmaceutical sector, drug research and increasing geriatric population expected to boost demand through FY26-27.

Outlook

Business outlook of Neuland Laboratories Limited looks healthy, with both CMS and GDS speciality expected to deliver growth. However, input cost volatility and other factors might impact the company’s financials. Over longer term, given its focus on delivering complex projects in line with clients’ technical requirements, the company continues to retain optimism that overall business will see growth in line with the company’s stated expectations and exhibit increased margins.

The company’s focus will be on entering into molecules where there is very strong synergy in terms of infrastructure. Therefore, the company aims to have molecules in its CMS and GDS businesses where capacities are fungible.

Neuland Laboratories Limited should be able to see long-term growth given its healthy pipeline of projects in CMS business and existing projects, DMFs it has filed and continued customer engagement for quality delivery. Growth ambition of the company continues to be supported by strong balance sheet, which gives the company confidence about calculated investments for long term.

The company focuses on reducing its direct sourcing dependency from China. It is dependent on China for 13% of its raw material and targets to further reduce this dependence to less than 10%.

Risks

Among biggest challenges that the company faces is steep increase in prices of certain raw materials. This can impact the company’s margins. However, the company continues to work through those challenges by negotiating long-term contracts including its cost position and negotiating better terms with customers.

The company sees an intensification of competition for certain Prime molecules where competitors and new entrants invested in capacity in past 2 years. If there is any disruption in production, its client base can be impacted. The company is highly dependent on regulated markets for revenue generation. Therefore, any sort of non-compliance can be a threat to operations.

Shareholding pattern

By March 2023 end, the company’s promoters made up ~36.14% of its total shareholding, while FIIs made up ~18.14%. DIIs, government and public made up ~7.10%, ~0.40%, ~38.22%, respectively. Mr. Ramamohan Rao Davuluri had ~24.97% and Davuluri Vijaya Rao held ~4.78% stake. In quarter ended March 2023, the company saw inflows from FIIs and DIIs. Stakes of FIIs and DIIs increased to ~18.14% and ~7.10% from ~17.70% and ~6.54%, respectively.

Track record of management

Management of Neuland Laboratories Limited has a strong track record which should help the company in achieving new growth measures. Dr. Davuluri Rama Mohan Rao is the company’s Executive Chairman who left Glaxo in 1983 and to join Indian Pharma Company for a brief period where he was responsible for successful USFDA inspection. He promoted Neuland in 1984.

Mr. Davuluri Sucheth Rao, who is Vice-Chairman and Chief Executive Officer of the company, is equipped with management skills in new business development, sales and marketing and operations management. At Neuland, he is responsible for establishing subsidiaries in US and Japan, increasing sales from organised markets, strengthening Quality Management Systems, leading the company’s strategy towards specialty APIs and CMS Business.

Mr. Davuluri Saharsh Rao has been designated as Vice Chairman and Managing Director at Neuland Laboratories. As a Managing Director, he focuses on overall growth performance of the company and realisation of its business plan. Other areas which he focuses on are investor relations, strategy, IT and operation of the company's subsidiaries in Japan and US.

Valuation and investment rationale

Stock of Neuland Laboratories Limited currently trades at ~23.5x of FY23 EPS, which is at a deep discount to sectoral average of ~33.4x, favouring a long position on this stock. Growth in the company is expected to be supported by established market position in API’s segment, well-established customer base, and geographical diversification in revenues.

Moving forward, the company’s valuation multiple is expected to be helped by healthy product diversity which supports scale and sustainability and comfortable financial risk profile. The company is an established player in market and has been operational for over 35 years. Therefore, its scale of operations remains healthy. It has developed over 300 processes and 75 APIs and has filed over 943+ Regulatory filings in US (62 active US DMFs), European Union (EU) and other geographies. Since its product basket is diversified, the company should be able to mitigate any risks related to new technology coming into market. 

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