Neuland Laboratories Limited - Transformation towards niche APIs?

It seems Neuland is building dedicated block for one of its CMS client Esperion therapeutics as announced Esperion linked in page.

Any other company would have promoted it as big achievement and announced it to stock exchanges but this management prefers to maintain low profile in spite of excellent work they are doing in CMS space.

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Q2 results on 07th November.

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Does all these anti-thesis still hold true? If not then what did the company do to make these wrong? Any feedback please? :pray:

Is the recent performance sustainable or is this one-off?

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Borrowed knowledge will let u in but you will not know how to get out. Pharma and chemicals needs deep dive and important metrics to understand and track. Why let FOMO decide your investment choices. Understand your blindspots and avoid getting into such pitfalls. There are hundreds of easier ideas to generate and track.
Best
Divyansh

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c269f21b-fa18-4761-9130-ffc4d1a00fa6.pdf (1.3 MB)

Neuland Q2 results are good.

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https://x.com/vivekchadha1996/status/1721820705304777146?s=46

All time high revenue and margins, double the number p2 projects

Number of P2 projects are doubled on YOY basis.

Steady shift from low margin prime to high margin Speciality & CMS Segment.

Molecules transitioning from development stage to commercialisation resulting in increase of revenue.

https://x.com/vivekchadha1996/status/1721835005671002128?s=46

Concall Audio Link-Neuland Labs

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Amazing set of number by Neuland Labs.
Highest revenue share from CMS segment.
All time high margin although it can vary QoQ.
Huge debt reduction
Number of CMS phase 2 molecules doubled YoY.

Concall - Working on few peptides in both NCE and also for generic.
Can create more capacities in Unit 3
Years of efforts in CMS is showing its results now.

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Be careful. As Sajal Kapoor sir says - Neuland has very lumpy business. And with such results,its making VERY HIGH BASE & HIGH EXPECTATIONS.
So maybe one should be careful while taking new entry and avoid falling prey for FOMO.

My Personal Opinion
Avergae Buying Price is 2500 and BIASED.
dr.vikas

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Lumpiness is there in the business but the base has now been increased and management has given a lot of clarity in the latest concal for long term sustainainibility…

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Management is very conservative, however the statements given by the management reflects the positiveness of the business…

Score 10/10 in almost all parameters:

The YoY revenue growth of 43% driven by the CMS vertical is a culmination of the efforts we have put in over several years.
The EBITDA margin of 33.4% therefore is a result of not only the revenue momentum but also a shift towards high margin business. We continue to have good visibility from both businesses and
are focussed on executing according to our strategic plan.”

“The CMS business continues to grow on the back of both development and commercial projects in
line with our expectations. Even as the external funding environment is tight, our pipeline of CMS
projects is evolving as we have doubled the number of P-2 projects over the last year. We will
continue to invest in our capacities and capabilities in line with our commitment to serve customers
with agility.”

CMS segment
CMS revenues driven by commercial molecules. Significant contribution from molecules in the pipeline also

Prime segment
In Prime segment Mirtazapine and Escitalopram were the key molecules- H1FY24 Business and Financial Highlights

Specialty business
Specialty business driven by Paliperidone, Apixaban and Donepezil
Regulatory Audits US FDA inspected Unit-3 and issued EIR (Establishment Inspection Report)
Unit-I inspected by EDQM (European Directorate for the Quality of Medicines)

Free Cash Flow (FCF) generation and utilisation

Generated Free Cash Flow of Rs. 120.6 crores during H1FY24
Partly utilised to reduce debt by Rs 26.0 crores

Capex Investment of Rs 43 crores for enhancement of future overall capabilities.

Working Capital
Reduction in working capital cycle to 102 days in Q2FY24 as compared to 148 days in Q2FY23

The CMS business continues to grow on the back of both development and commercial projects in line with our expectations.

Even as the external funding environment is tight, our pipeline of CMS projects is evolving as we have doubled the number of P-2 projects over the last year. We will continue to invest in our capacities and capabilities in line with our commitment to serve customers with agility.

Steady shift from low margin Prime to high margin Specialty and CMS segments
• CMS business caters to Innovator customers on an exclusive basis, developing and manufacturing APIs/Intermediates in line with rigorous
customer expectations hence is highly concentrated in terms of customers
• Specialty segment works on complex products and technologies, hence has a focused approach towards select customers.

• Pre-clinical to P-3: Neuland generates revenue by process research & development as well manufacturing quantities for clinical trials
• *Pre-Reg/Reg: Phase-3 complete; Molecules filed but not yet commercial (Earlier labelled as ‘Development’)
• Commercial: Neuland generates revenues by manufacturing APIs for commercial novel molecules for innovators
• Steady trend in molecules transitioning from development stage to commercialisation resulting in increase in revenue from commercial products.

Focus Areas
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Continue to invest in R&D capabilities and manufacturing technologies to attract more
RFPs while improving conversion rate 1
2 Lifecycle management of commercial products
3 Continue to focus on molecules in Phase II and later stages of development
4 Continue business development focus on biotech companies
5 Diversify geographic focus.

Went through the current concal 3 times to get the sense of current and future prospects. Management is crystal clear about its vision and capabilites.

Company is now debt free and started generating free cash flows. Management is conservative yet efficient in capital utilization.

Retailers shareholding has come down from 40.73% in Dec 22 to 35.08% in Sept 23 , however one good thing is that retailers are the largest shareholders… hope they will hold on for longer period to compound the benefit if Company continues to perform in this way.

Disclosure: Invested from levels of 1100 and further added today for very very long term as a coffee can investment. Views are biased.

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Following important takeaways from con call…

  • Neuland has established itself as the privileged CDMO players with the innovator companies and can get assured orders before creating new capacity.
  • Very focused on what to do and what not to do, which speaks about the management vision.
    *Very optimistic about peptide business in the future as work with two big European Pharma innovators is going on.
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Considering the management does not like giving revenue guidance, how does one value Neuland in-regards to at what price is it under valued, correctly valued or over valued. What metrics should one be using to evaluate the valuations so that one can make a better and informed decision when increasing or reducing allocation?

For valuation, there are many things which one will have to infer from the management commentary , past track record, execution capabilities, growth opportunities, capital allocation track record, corporate governance track record, clarity of thought of management, walk the talk of management etc etc…

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Valuation is a very subjective topic to discuss. Here are my two cents in this case. Thanks to @Worldlywiseinvestors, Aditya Khemka, and @unseenvalue for their public teachings.
The common framework for valuing Pharma companies is EV/EBITDA and PE. @Worldlywiseinvestors mentions following bull, base, and bear scenarios. In the bull case, the aspiring company (Neuland) will reach the valuation of leaders in the segment (such as Divis and Syngene). The base case will be for EV/EBITDA to grow according to the YoY growth of the company, and the bear case will be going below the last 3 or 5 years of EV/EBITDA.
In similar lines, Aditya Khemka mentions underperforming and outperforming companies, essentially leaders and newcomers. In the case of CDMO, he mentions a minimum of 12 and a maximum of 25 EV/EBITDA multiples, and in terms of PE, 18-45, which covers the broad range.
If you believe Neuland is still cyclical, the current valuation might have no margin of safety. If you believe it has joined the list of CDMO players, you may expect a consistent compounder type of company and growth rates.

The Art of Valuing Pharma & Healthcare Companies in Youtube.

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I usually do a reverse DCF to get an appx sense

To make 5yr cagr of 18%, earnings need to grow at 20%, assuming exit multiple of 25 which is not outrageous to me

!

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And the capex is here. Tripling the capacity at unit-3 from the current utilisation level.

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Company has generated free cash flow of around Rs 120 Cr and has now announced a CAPEX of Rs 128 Cr.
Reason
To maintain and cater to the growing demand of our customers.

Capex will be completed in next 24 -36 Months.
Exisitng capacity is 305 KL.
Proposed capacity 207 KL.
Current Capacity utilisation 62%.

Take away points:

Free cash flows generated is being utilised for CAPEX. Company is presently debt free and future CAPEX will also not require any debt as frees cash flow will be sufficient to take care of expansion.

Current capcity utilisation will further increase from 62 % to 90% there by operational leverage will start playing to further improve margins.

Company is having visibility of future growth.

Efficient captial utilisation.

CAPEX investment seems to be chanelised in higher margin products.

Management walks the talk so we can easily infer that Company is having visibility of future orders and therefore increasing capacities. It also ratifies the point that vendors have trust in Neuland.

I look forward for above criterion in compounding stocks.
Disclosure: Invested and will further build position through SIP.

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https://x.com/vivekchadha1996/status/1724482521419956479?s=46

Key takeaways from concall, Feel Free to add more points.

Will continue to invest through sip mode!

#Biased #Invested

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Keeping in view the molecules going commercial and capex announced recently,future growth potential is excellent. However the price seems to have gone up very fast. It is quoting around 4 times the annual sales. One should wait for correction before investing fresh money.
Disclosure … Invested .Avg price 900/-

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