Neuland Laboratories Limited - Transformation towards niche APIs?

Stock Opportunities Not-so-Hidden Gems
108

Q4FY21 concall Notes

  1. (EBITDA margins): RM sourcing faced logistical issues due to Covid-19 lockdowns. Plus a couple of one-offs with respect to income tax and NGT settlement.
  2. (Why Propofol does not face more competition): China has never established itself as a credible source for complex molecules. Propofol is complex to make. Requires a very high level of compliance to manufacture it regularly.
  3. (Unit 3 status): 2 APIs commercialized from Unit 3. Unit 3 is where we will create more API capacity for future business. Unit 1 & 2 will see minimal investment (debottleneck). Unit 3 will see volume increases. Unit 3 will have similar asset turns to unit 1 and unit 2.
  4. (Manufacturing and employee costs): in Unit 3, We are recruiting many employees and there is a period of up-fronting of manufacturing costs as well which is showing up. Cost structure is the same.
  5. (Pricing): GDS pricing is referenced to competition. CMS are long-term contracts and pricing is flexible, we can negotiate prices by passing through certain costs. In CMS, when we are primary source, margins are higher, for secondary source, they are a bit lower.
  6. (Peptides): Most peptides are part of CMS PF. 12 out of 78 projects are peptides in CMS. Peptides capabilities are in Unit 1. Will further augment peptide manufacturing in this year. 2 CMS peptides are close to commercialization. 2 peptides under development in GDS. Will create further peptides capacities in Unit 3 when needed.
  7. (supply chain): We are making it robust. Don’t want to stop sourcing from China. Want multiple suppliers. Shorten the supply chain.
  8. (CMS molecules commercialization): We can expect some good part of commercialization to happen in 2-3 years time. We cannot provide more exact timelines. These molecules are late stage molecules and are in various stages including validation stages.
  9. (R&D spends): 5%-7% of our total spends are on R&D. For CMS it is charged to the customer.
  10. (CMS): Better to look at it in an annualized basis and YoY not QoQ or quarterly.
  11. (margins guidance): We expect business mix to continue improving and improve margins. Also expect more operating leverage to kick in.
  12. (Capex guidance): As of right now, we see similar kind of capex requirements in FY22. Will evaluate upcoming projects and evaluate the ROI and then make more concrete decisions regarding capex.

My Thoughts

I am quite happy with the Q4FY21 results. Key takeaways for me:

  1. The normalized operational EBITDA margins were 15.4%. The one-off gains (due to the sale of real estate) get balanced out by one-off losses due to settlement with income tax and NGT (both ~15cr). Ex of the one-offs. The EBITDA margins dropped a bit due to the change in business mix (much lower CMS contribution in this quarter).
  2. CMS pipeline is looking very robust. Molecules under development have gone up from 12 to 14 in just 1 quarter. Many of these are peptide molecules. When reasonable commercialization happens in the next 2-3 years, the CMS revenues would increase substantially.
  3. Some of the manufacturing and employee costs are front-loaded due to unit 3. This is also great because it implies better operating leverage kicking in in FY22 as unit 3 gets commercialized.
    Edit:
    Edited first point to point out correct ebitda margins based on multiple subsequent posts by people. Thanks for the corrections.
    Disc: Invested. Full PF here. This is not a buy or sell recommendation or investment advice.
21 Likes