Neuland Laboratories Limited - Transformation towards niche APIs?

In my opinion those who are tracking Neuland should watch out for probable rise in freight rates and subsequent margin erosions in coming quarters.

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Global sales (Billion Dollars/year)

Octreotide - $1.8 B
Liraglutide - $4.9 B

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That will be depend upon what the incoterms are. Majority of exporters sell on FOB terms, which basically means their EU customer (importer) pays for the freight, import and insurance costs. So they may be hit harder on import side than on exports for freight rise. But then they claim to be have substantially reduced China dependence on the KSM.

Please read the post I’ve quoted.
They had been impacted by the freight costs in the past.

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Your understanding of FOB is not correct. Under most common FOB incoterms, supplier pays freight to destination port and charges an FOB rate at destination from the customer. Under EXW incoterms, freight is borne by the customer from supplier’s Plant. I think most exports from India are on CIF basis, hence freight ought to be borne by Indian suppliers.

Freight On Board - Understanding How FOB Works in Shipping.

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Aditya Khema’s (InCred Health) views on Neuland Labs.

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Neuland labs Q4 FY22 results.
Revenue, EBITDA is up on QoQ while it is Flat YoY.
PAT is up both QoQ and YoY.

FY 22 Revenue when compared to FY21 is flat owing to weak GDS offtake from Customers.

Dividend Declared Rs 5/- per share.

Q4 results are decent.

Let us see the management commentary in Today’s Concall sheduled at 8 PM .

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Despite so many headwinds like Raw material pressure, lower off take by customers, higher logistic costs etc. Neuland Labs performance is pretty decent on yearly basis. FY22 revenues are higher than FY21, margins are just 1% down, lower operating net profit due to higher depreciation on account of Unit-3 commercialization

Operating Margins down ~1% despite 3% increasing in employee expenses ( 16% to 19% of sales). Increase in employee expenses is due to higher head count again on account of Unit-3 commercialization, otherwise operating margins would have been higher a little compared to previous year.

If you compare with the Laurus labs, performance of Neuland labs is better. (FY22 vs FY21). Though it is unwise to compare both these companies I did it due to the fact that both companies faced similar headwinds

Disclosure: Invested in Both

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Personally, the next gen management does not appear fully convincing to take the business to next level. When questioned during earnings calls, their typical response is “some products have grown, some have declined which has led to this revenue trend, but we see healthy business momentum going forward.” Their business is still heavily reliant on Prime APIs, where pricing is left to market forces. And they haven’t been able to scale up their CSM business that well.

Look at the below chart on Synthesis revenue for Laurus vs Neuland. Both were at the same position 5-6 years back, and now Laurus is >3x the scale of Neuland.

It’s a clean company from a corp gov and FDA compliance perspective, but I personally see better opportunities to invest in at the moment (e.g. Suven, Laurus). I’d love for them to succeed (and in fact they might post blowout earnings in the future), but this industry seems to be benefiting scaled players.

Disc: was invested earlier, recently sold off my position.

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Thanks for sharing this insight Ravindra. Since you seem to have studied both Laurus and Neuland, it will be interesting to know your views on the future growth triggers for both and the probable growth trajectory of each.

Incred reports has some positives.

  • RM pricing transient,.
  • Well posed for growth.
  • Unit III capacity additions will benefit Second order play on innovators.
  • Currently (in April-22) 7X FY24 EV/EBITA. They value Nueland at 12X FY24EVEBITDA, still lesser than peers due to generic APIs

Will be interesting to see any other views from any of us.

Disc - invested

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Is the Neuland story stuck or is it actually building towards some major revenue/growth unlocks?

I am not invested but do consume all Q concalls and presentations. The business seems stuck to me for the last few quarters without any near term growth triggers being highlighted by the Management. Would be interesting to hear some bull thesis for Neulands, not able to grasp it.

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I would also tend to believe that Neuland is one company which has high promise but the delivery fall far short of expectations. This obviously has to do with the competitive Generic industry in which they operate. Even the CSM segment is not able to scale up significantly over the last many quarters. The molecules that they are working on are fairly challenging and complex and taking them to the finish line (themselves and for the partner) is always going to be challenging.
In nutshell, I believe given the industry that they are in and the complexities of FDA/Technical etc and their small size, it is not going to become a secular growth story for some time. even if they do well in 1-2 quarter, business may revert back to mean margins and growth thus disappointing investors. The only way to play this can be buying at fairly low valuations and then hoping for management to deliver numbers for 1-2 quarter and moving out after making some trading profits.
Regards,
NIkhil
Disc: Not invested but following.

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There were challenges in the Levetiracetam sales in the past few quarters, which is the biggest revenue driver in prime segment of GDS for Neuland. Management reasoned that it was because of lower customer demand & customer holding inventory. But it hasn’t changed even after 3 quarters. In yesterday’s earnings call also, management said the same commentary.

(You can hear the discussion about Levetiracetam sales from 34:13 in Q1FY23 call)

I’m adding past earnings call snippets to understand the progression of this issue and how management justified the issue.

Q3 FY21: Levetiracetam & Mirtazepine are the key growth drivers in GDS. Will continue to invest in those molecules and become market leaders.

Q4 FY21: Our GDS business was led by key molecules Levetiracetam & Mirtazepine.

Q1 FY22: We have gained market share and increased margins on Levetiracetam & Mirtazepine.

Q2 FY22: For Levetiracetam, we’re strong in the markets that we’re in but we’re NOT seeing very strong spurt over there.

Reason- these are also the CYCLES that you have for these products.



Q3FY22: Products which were historically doing well like Levetiracetam & Mirtazepine didn’t perform to our expectations.

Reason- Lower customer off take & customer holding on to inventory from the orders in the past or they don’t have a production campaign or need right now.


Q4FY22: Levetiracetam which has been doing well for us historically had challenges this year.

Reason- We believe that this is because of low customer off take, perhaps because of high inventories and we expect that the volumes should recover in coming quarters.

Yesterday’s con call

Q1 FY23: Biggest impact in the GDS was from Levetirazetam. It is also the largest product in our GDS segment which impacted our performance. We think it is temporary.

Reason- because of combination of reduction in demand & inventory build up at customer’s end.

As Mr.Aditya Khemka pointed out in the earnings call, if it was due to inventory build up at customer’s end, it would have been temporary. If the challenge is due to increased competition from peers, then it is alarming.

For Neuland the issues with Levetiracetam API sales started from Sept-Oct 2021 and it is persisting even now.
Another interesting thing to note here is that on May 2021, Divi’s has talked about expanding their Levetiracetam manufacturing with improved changes (background integration, increasing yield, solvent recovery, conserving raw materials) and the expansion to be completed within 3 months. That is the time period where gradually challenges arose in Levetiracetam business for Neuland.


Neuland management never acknowledged increasing competition in Levetiracetam sales or losing market share for their biggest revenue driver in generic business. They always had same explanation of “lower customer off take & customer holding inventories”. They could have given more clarity on this situation.

CMS business is also stagnating for so many quarters. I’ve written detailed post about these in the past.

Even after having 21 molecules in the commercial CMS stage, their CMS commercial revenues are not showing significant growth. I’ve talked about how Austedo (Deutetrabenazine) revenues are growing for Teva in clear contrast to Neuland’s CMS revenue growth.

For a different perspective, this is how Laurus scaled up their custom synthesis in the last 3 years.

I don’t know if it is fair to compare custom synthesis of Laurus to that of Neuland since molecules and customers are different. But lack of momentum or lack of growth is pretty much visible in the case of Neuland. In the yesterday’s earnings call, management has said the reason for the weak Custom synthesis was because of technical challenges they faced during scaling up a molecule from lab to commercial scale and subsequent delay in delivering molecule to the innovator. This is something an innovator doesn’t seek in their manufacturing partner. Innovators always want timely delivery from their manufacturing partner and this reason can compel them to give contract to someone else.

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