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Gland Pharma Ltd’s June quarter (Q1FY23) was plagued by various troubles. India revenues fell by 72% year-on-year (y-o-y) as the shutdown of two of its manufacturing lines for productivity improvement hurt business. Supply constraints added to the woes. The shortage of syringes meant a revenue loss of 165 crore in Q1FY23. It did not help that last year’s Q1 base was high because of the sale of covid related products.

Overall, Gland Pharma’s consolidated Q1FY23 revenue fell by almost 26% y-o-y to 857 crore, sharply lower than analysts’ estimates.

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Investors were upset. The company’s shares hit a 52-week low of 2,180 apiece on Thursday on NSE, closing the session lower by almost 6%.

On the bright side, lower contribution from India and rest of the world markets led to a rise in Q1 gross margin by 284 basis points (bps) to 56.3%. However, the surge in power and fuel expenses and high employee costs led to a 631 bps contraction in Ebitda margin to 31.5%.

High costs and the absence of big launches in FY23 would come in the way of a significant margin improvement. Even so, over the next two years, the company aims to achieve Ebitda margin of 33-35%.

“While the near-term outlook is sluggish, the product pipeline (61 pending abbreviated new drug applications) and entry into new markets such as China (first approval expected in H2FY23) provide medium-term growth visibility. Even as we like the entry into the biologics CDMO space, the market is ignoring the high gestation period," said analysts at Kotak Institutional Equities in a report on 21 July. CDMO is contract development and manufacturing organization. Accounting for lower sales, lower profit share in the US and higher costs, Kotak has cut FY2023-25E earnings per share estimates by 11-13%. Other analysts have also cut earnings estimates.

Long-term growth prospects appear intact, said analysts. Gland Pharma said there is no slowdown in demand. That’s a silver lining. Easing of supply constraints would be a key monitorable. The syringe shortage is likely to be resolved in Q2 while procurement hurdles for other components would persist for 4-5 months. The impact from price erosion is relatively low. In view of this and demand-supply dynamics, analysts at Yes Securities do not see the need to cut price-to-earnings multiple especially as FY24-25 growth expectations may not have changed considerably. Based on Yes Securities’ earnings estimates for FY24, Gland Pharma’s shares trade at nearly 27 times.

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