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Neuland Labs - Initiating Coverage
Neuland Labs - Initiating Coverage
Neuland Labs
BUY
INDUSTRY PHARMA ‘Neu’ growth avenues
Although NCE drug research remains a distant incremental ramp up in salmeterol, Austedo, Bilastine
CMP (as on 15 Mar 2018) Rs 704 and a peptide product.
dream for Indian pharma companies, they are
Target Price Rs 1,065 making strong inroads into API CRAMS which is at CMS - At inflection point: NLL is quickly establishing
Nifty 10,360
the core of innovation for pharma MNCs. Neuland itself in the CRAMS space with the help of a
Labs (NLL) is one among these Indian companies. competent BD team in both the US and Japanese
Sensex 33,686 markets. At present, it has 42 molecules in its
NLL has made great strides in API CRAMS over the
KEY STOCK DATA past few years and has managed to win clients from portfolio while 5 are in the commercial stage. With
Bloomberg NLL IN key regulated markets like the US, Europe and the scale up expected in Austedo and Bilastine sales
and a few more potential launches in GI, CNS and
No. of Shares (mn) 9 Japan. While generic API manufacturing remains
renal categories, we see FY19-20E as breakout years
MCap (Rs bn) / ($ mn) 6/96 the mainstay of NLL’s overall business and the for CMS. Additionally, CMS revenues are much
6m avg traded value (Rs mn) 33 generic salmeterol launch in the US would be the stickier than the generic API business. Expect CMS
STOCK PERFORMANCE (%)
key near term trigger for the stock, our investment business to grow at 16% CAGR over FY18-20E.
thesis is largely based on the scale-up it can achieve
52 Week high / low Rs 1,727 / 668 Niche APIs – low volume, quality products: NLL
in CMS segment (API CRAMS); especially given the places a strong emphasis on the technical complexity
3M 6M 12M lucrative product opportunities (Austedo, Bilastine and focuses on its areas of strength such as chiral
Absolute (%) (17.9) (33.7) (38.3) and a peptide product) and a competent business chemistry, hydrogenation, inhalation products etc. So
Relative (%) (18.6) (38.1) (52.9) development (BD) team. far it has developed 25 molecules in this segment.
SHAREHOLDING PATTERN (%) With FY19 set to see a resumption of growth, we The salmeterol API remains the key growth driver in
Promoters 51.7 believe that the CMP (down 60% from peak in Apr- the near-term. With several molecules likely to see
17) offers an attractive opportunity for investors to generic entries in the US market and NLL likely to be
FIs & Local MFs 6.2
time an entry. We foresee 19% revenue CAGR, the major API supplier for a few of them, we expect
FPIs 7.4 niche API sales will ramp up to Rs 1.9bn in FY20E from
800bps margin expansion and 7x earnings over
Public & Others 34.8
FY18-20E (favourable base). Initiate coverage with a Rs 1.2bn in FY18E.
Source : BSE BUY rating and target price of Rs 1,065 (16x FY20E). Financial Summary
Amey Chalke
Investment thesis YE Mar (Rs mn) FY16 FY17 FY18E FY19E FY20E
amey.chalke@hdfcsec.com Earnings bottomed out: With a washout FY18 nearly Net Sales 5,100 5,727 4,974 5,878 7,093
over, NLL is likely to report a strong recovery in FY19. EBITDA 809 880 487 852 1,270
+91-22-6171-7321
This will be largely driven by returning volumes in the APAT 269 328 79 283 587
niche API and CMS business segments, with all eyes Adj. EPS (Rs/sh) 30.9 37.1 9.0 32.0 66.5
Siddhant Mansukhani on the launch of gAdvair (salmeterol) in the US, P/E (x) 22.8 19.0 78.4 22.0 10.6
siddhant.mansukhani@hdfcsec.com where NLL is a key supplier. 60% of the jump in RoE (%) 15.7 16.2 3.6 11.8 21.1
+91-22-6639-2476 earnings in FY20E would be contributed by the Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
NEU
Investment thesis
CMS and niche segment
Improving Business Mix Incremental Impact Of Key Product Opportunities
remains key growth drivers
Prime APIs (%) Niche APIs (%) CMS (%)
for both revenues and 7.2bn 1.3 bn 66.4/sh
earnings and likely to 11 13 17
25 21 22 1.0 0.2
contributed more than 55% of 30 16.3
Other Revenues
18 0.8
top line in FY20E 22
27 0.4 0.3
23 27 9.9 Peptide product
26
26 Bilastine
0.3 9.5
Incremental sales from 4.3 Austedo
71 5.0
gAdvair, Austedo, Bilastine 65
57 56 51 17.4 Salmeterol
49 44 0.5
and a peptide product (most
9.0 FY18E
likely Trulance) APIs are likely
to contribute 60% of the FY20 FY20 FY20 EPS
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
earnings in FY20E Revenues EBITDA
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
27 37
Page | 2
NEU
Story in charts
Revenue: ~8% CAGR Over FY17-20E EBITDA Margin: ~250bps Expansion By FY20E
We foresee ~8% rev. CAGR
Revenue (Rs bn) YoY Growth (%) EBITDA (Rs bn) EBITDA Margins (%)
over FY17-20E
20.7 17.9
18.2 15.9
15.2 15.4
14.2 14.5
12.3 12.7
However, ~19% CAGR over 8.7
9.8
FY18-20E, considering the 2.7
1.1 0.7
sharp business dip in the
current FY
(13.2)
4.6 4.7 4.7 5.1 5.7 5.0 5.9 7.1 0.6 0.7 0.7 0.8 0.9 0.5 0.9 1.3
FY13
FY14
FY15
FY16
FY17
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY18E
FY19E
FY20E
The EBITDA margin will scale
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
up on the back of recovery in
niche APIs and CMS
businesses, launch of lucrative
projects in the CMS business PAT CAGR Of 21% Over FY17-20E Return Ratios To Recover Fully Only By FY20E
Net Profits (Rs mn) YoY Growth (%) RoE (%) RoCE (%)
and operating leverage
14.2
434.5 26.0 13.2
13.8 11.2 11.2
256.0
24.1 9.7
21.1
107.6 7.8
68.2 15.7 16.2
Return ratios will recover fully 94.5 4.3 11.8
only by FY20E after the FY18E (40.5) 22.1 11.2
blip and new facility (75.8)
268
160
269
328
283
587
79
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Page | 3
NEUL
Table of Contents
Company background ............................................................................................................................................ .5
Prime APIs: Legacy business .................................................................................................................................. .6
Nice APIs: Scaling up .............................................................................................................................................. .8
CMS: Massive opportunity ................................................................................................................................... .12
Business restructuring ......................................................................................................................................... .15
Financial analysis ................................................................................................................................................. .16
Facilities and regulatory status ............................................................................................................................ .18
Valuation .............................................................................................................................................................. .20
Management profile ............................................................................................................................................ .23
Neuland Labs in charts ......................................................................................................................................... .24
Financial statements ............................................................................................................................................ .26
Page | 4
NEUL
Company background
NLL is a 30-year-old Hyderabad-based Pharmaceutical to facilitate supplies to these regulated markets, NLL
NLL’s business is divided into company engaged in R&D, manufacturing and has 2 USFDA approved facilities.
marketing of a wide range of bulk drugs,
3 main segments – NLL’s business is divided into 3 main segments –
intermediates and custom synthesis of APIs (CMS).
• Prime APIs: Mature APIs, Custom Manufacturing Solutions (CMS): Work
For many years it was manufacturing commoditised
typically with high executed exclusively for the customers on
APIs for generic companies. It has now ventured into
competition in the API space. products at various phases of their life-cycle.
the custom synthesis business which has grown at
• Niche APIs: APIs with Prime APIs: Mature APIs, typically with high
~35% CAGR over the last three years, while the API
complex processes and a competition in the API space.
generic business is moving from low to high-margin
niche presence Niche APIs: APIs with complex processes and a
products. The new API basket is into lucrative and
• Custom Manufacturing niche presence.
niche segments like ophthalmics, schizophrenia, anti-
Solutions (CMS): Work The company operates in eight major therapeutic
asthma, anti-fungals, anti-depressants and neurology.
categories: cardio-vasculars, the central nervous
executed exclusively for the
customers on products at
NLL has meaningful footprints in several countries, system, anti-infectives, anti-asthmatics, anti-fungals,
with more than 80% of its revenue arising from anti-ulcerants and anti-spasmodics. Its strong R&D
various phases of their life-
exports. It has filed 650+ DMFs all over the world, capabilities (team of 200 scientists) enable it to
cycle.
including 51 in the US. The US and Europe are key operate across the product life cycle, and deliver with
markets, accounting for 70% of its exports. In order speed and efficiency.
Business With Revenue Split
Page | 5
NEU
basis (opex), hopes to add at least Rs 100mn to the Prime APIs To Grow 4% CAGR Over FY17-20E
company’s gross margins. Prime APIs (Rs bn) YoY Growth (%)
Growth outlook: Apart from Labetalol and 8.8
FY15
FY16
FY17
FY18E
FY19E
FY20E
~56% and ~49% respectively which significantly go
down in FY20E to ~44% & 28% respectively. Source: Company, HDFC Sec Inst Research
Page | 7
NEULAND LABS : INITIATING COVERAGE
like the US and UK and sells at 15-20% discount in next six months. In our estimates, the EPS from this
other markets. NLL makes a gross margin of ~85% on product is Rs 28/sh by FY20E (75% of FY17 EPS), and
In our estimates, the EPS from this product. Rs 43/sh in the peak sales scenario.
this product is Rs 28/sh by
FY20E (75% of FY17 EPS), and With expectations of Advair going generic by Jun-18,
Rs 43/sh in the peak sales we expect revenues from the US to resume in the
scenario Salmeterol Opportunity Size
FY19E FY20E Peak
Top-line (Rs mn) 500 650 1000
PAT Margin 39% 39% 39%
PAT (Rs mn) 193 250 385
EPS (Rs/sh) 21.7 28.2 43.3
Source: Company, HDFC Sec Inst Research
Cipla Mylan
Lupin Sandoz
Amneal
Page | 9
NEULAND LABS : INITIATING COVERAGE
Important medium-term opportunities Apart from generic Advair which is likely to see the
In the niche segment, there are several other API light of the day in FY19, several other molecules like
opportunities. We believe that in many of these Azopt, Trusopt/Cosopt, Diprivan, Donepezil and
products, the company is selling APIs to either Lexapro would start adding meaningfully with
European or RoW markets and is yet to see the expected ramp up in the US and other markets. At
impact of generic player entries in the US market. present, we believe, all these molecules together
This would definitely increase the total revenue should be contributing close to Rs 800mn sales and
potential from these molecules. has potential to go up to Rs ~1.5bn sales post generic
API supplies to the US market.
#It is important to note that Important Niche APIs – Medium Term
the US API market size is Pre-generic Annual Estimated
Generic
indicative only. The figures US form. API Price Requirment total API
Brand API Indication players DMF filers
are calculated by us and we sales s(US$
in market
(US$/kg) in the US market
have not used any 3rd party mn) (Kg) (INR mn)#
data to obtain these figures Advair Salmeterol Respiratory 2,250 None 17 65,000 100 423
Diprivan Propofol Pain 500 3 10 20,000 4,000 5,200
Aricept Donepezil CNS 2600 20+ 20+ 3,000 15,000 2,925
Also, there are a number of Zyprexa Olanzapine CNS 1,950 12 20+ 2,000 3,000 390
molecules that appear to Trusopt/Cosopt Dorzolamide Ophthalmic 340 6 12 5,500 500 179
have a small US market size, Lexapro Escitalopram CNS 2900 14 20 1,100 5,000 358
however, we believe that the Comtan Entacopone CNS 100 5 18 220 17,500 250
global market size is likely to Zetia Ezetimibe CVS 1800 10 15 1,800 2,000 234
be very significant. For eg Azopt Brinzolamide Ophthalmic 200 None 9 18,000 100 117
salmeterol, bosentan, Source: Company, HDFC Sec Inst Research (2) Bosentan – Branded Tracleer, marketed by
entacopone etc Important long-term opportunities Actellion as a tablet and more recently a suspension.
This is used for the treatment of high blood pressure.
Beyond two year time line, there are many lucrative
The patents on the tablet have expired. However,
API opportunities where NLL is working on. This list
there are still no generic players in the US. The
includes Sugammadex, Paliperidone, Posaconazole,
suspension was approved in Sep-17, with patents
Deferasirox, Dabigatran, Lurasidone and Bosentan.
expiring in 2027. Although this is low volume product,
Some of these molecules are low volume products
it will be a highly profitable product for NLL.
but could add meaningfully on EBITDA line. (1)
Paliperidone / Paliperidone palmitate – currently NLL (3) Deferasirox – Branded Exjade/Jadenu, this
is generating around Rs 150mn from this product molecule is used to treat chronic iron overload. While
(Invega franchise), which has significant room to Exjade patents expire in Apr-19, the innovator had
grow. The mgt believes that this could be a Rs 300- filed a new formulation (Jadenu), which has a later
400mn product for them. With the injectable version patent expiring in 2034. This is another Rs 200-300mn
likely to become generic in 2019. potential API product globally for NLL.
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NEULAND LABS : INITIATING COVERAGE
(4) Posaconazole – Branded Noxafil and marketed in Growth outlook: With gAdvair API supplies expected
three formulations by Merck. Patents on two of these to ramp up in FY19E, higher sales from gAzopt,
three are expiring by 1HFY20. Ramp up in API gDiprivan, gTrusopt, gDonepezil and other products,
supplies should happen from 2HFY19/FY20. This is a the niche segment revenues are likely to grow 25%
With gAdvair API supplies high-volume product (more than a tonne required CAGR over FY18-20E. This will increase the revenue
expected to ramp up in FY19E, anually) and can add meaningfully to both the top contribution from ~24% now to ~26% in FY20E while
higher sales from gAzopt, and bottom lines. on profitability it should add 26% to EBITDA in FY20E
gDiprivan, gTrusopt, (5) Sugammadex – Branded Bridion and marketed by (v/s 21% in FY18E).
gDonepazil and other Merck. Global sales in 2017 were US$ 700mn. We Niche APIs – Traction To Resume After FY18E Blip
products, the niche segment believe this is a potential Rs 300-400mn product for Niche APIs (Rs bn) YoY Growth (%)
revenues are likely to grow NLL. It is very complex to manufacture, not yet
34.4
25% CAGR over FY18-20E approved worldwide. The US patents are due to 33.4
expire in Jan-2021. NLL is working on the product and
is likely to file DMF soon. 23.1 7.6
Competitive advantages/entry barriers: (1) Pure-play 16.8
API company, increases likelihood of business as
competitors are unlikely to include formulation rivals
(20.0)
on a filing, (2) Strong technical capabilities, evidenced
by proficiency in molecules like salmeterol (3)
Complications in including multiple suppliers in a 1.0 1.4 1.5 1.2 1.6 1.9
regulatory filing, as innovators have to prove the 2nd
FY15
FY16
FY17
FY18E
FY19E
FY20E
supplier’s molecule also meets all technical
specifications, (4) Strong operating and process
competencies leading to cost leadership. Source: Company, HDFC Sec Inst Research
enough to cross US$ 1bn sales each for two players. generation H1-antihistamine. Clinical efficacy at a
We assume peak sales of US$ 1.5bn from TD and HD dose of 20 mg for the treatment of allergic rhino
Even on conservative by 2022. Considering its small base, significant conjunctivitis (perennial and seasonal) and urticaria
estimates, just because the benefits should still accrue to NLL. has been demonstrated. Bilastine appeared safer
patient pool is so large at than cetirizine in terms of adverse effects upon the
Austedo Opportunity
500,000 patients, it is large Peak CNS. It does not interact with alcohol, and does not
enough to cross US$ 1bn sales FY19 FY20 enhance the central depressant effect of lorazepam.
Potential
each for two players. We Daily consumption 30.0 30.0 30.0 Regarding the ability to drive, a dose of up to 40 mg
assume peak sales of US$ Yearly (kg) 0.02 0.02 0.02 (i.e. twice the standard recommended dose) has
1.5bn from TD and HD by No of Patients 5,000 10,000 25,000 been shown to be safe for the patient, is well
2022. Considering its small Total Teva sales (US$ mn) 200 400 1,000 tolerated, without objective alterations in driving
base, significant benefits ability. These characteristics define bilastine as an
Total API required (kg) 110 219 548
should still accrue to NLL interesting drug from the therapeutic perspective and
NLL sales (Rs mn) 214 427 694
extremely safe regarding CNS effects.
NLL earnings (Rs mn) 60 120 194
NLL EPS (Rs/sh) 5 11 18 NLL is the 2nd supplier for this molecule, having ~50%
Source: Company, HDFC Sec Inst Research of the supply share. NLL is also in discussion to supply
Bilastine, sold under the some key intermediates to the other API supplier,
Bilaxten which could be a significant boost to the business
brand name Bilaxten, is an
from Faes. Per our discussion with NLL, the innovator
anti-histamine medication Bilastine, sold under the brand name Bilaxten, is an company does not intend to push for US approval for
which is used in the treatment anti-histamine medication which is used in the this product in the foreseeable future. However,
of allergic rhinoconjunctivitis treatment of allergic rhinoconjunctivitis and urticaria expansion into other geographies is underway and
and urticaria (hives). It is (hives). It is marketed by Faes Farma, a Spanish Faes Farma is launching in new markets every year.
marketed by Faes Farma, a pharmaceuticals company.
We believe this product has potential to become Rs
Spanish pharmaceuticals Better efficacy and fewer side effects: It is a new 700-800mn from current Rs 300-400mn over next
company and is another second-generation antihistamine with a better two three years on the back of market expansion and
important CMS project for NLL pharmacological profile compared to other second supply of intermediates to other API supplier.
Page | 14
NEULAND LABS : INITIATING COVERAGE
Trulance, a peptide product Validations for the Trulance API will be done in FY19
and mgt believes that if the validations go well, there
that we believe is a huge
is a high chance of securing the business. Our
potential opportunity for NLL,
research of this product leads us to believe that this Source: Company, HDFC Sec Inst Research
is a direct competitor of
could be a game changing opportunity for NLL and Trulance is a direct competitor of Linzess (linaclotide),
Linzess (linaclotide), the #1 the #1 prescribed brand for the treatment of adult
can add atleast RS 20 eps at peak potential (assuming
prescribed brand for the patients with IBS-C and CIC, based on QuintilesIMS
50% market share).
treatment of adult patients data. Linzess was launched in Dec-2012, and has since
with IBS-C and CIC, based on (2) A molecule approved for the treatment of renal
disease through the 505(b)(2) route. NLL has started achieved great success. 2017 sales are likely to be
QuintilesIMS data close to US$ 700mn.
doing validation and the mgt believes that it is very
likely to get this business. NLL will be the 2nd API We believe that Trulance has a best-in-class profile,
supplier but will get the majority of the volume share. with better tolerability and convenience. While
Trulance is a high-volume efficacy was gauged to be similar after the trials,
While CNS projects are typically at gross margin level
product, and per the mgt, API of 60%+, the margins on this molecule will be lower Trulance has the following advantages; (1) As a side
requirement is ~100kg at ~45%. However, it is a high volume product and effect, diarrhea occurrence was 5% for Trulance and
annually. The market for the hence an attractive opportunity for NLL. 16% Linzess. Severe diarrhea was 0.6% for Trulance
approved indications is also compared to 2% for Linzess. Also, diarrhea first
(3) A CNS molecule from a European customer. This is
growing rapidly (2x over occurred within the first two weeks under Linzess and
a high dosage tablet for which the customer is
2014-2016). With plans to within the first four weeks for Trulance, (2) Linzess
currently manufacturing the API in-house at a
price the API at Rs 12.5mn/kg, significantly higher cost than NLL is proposing. NLL must be taken on an empty stomach, with the first
even at a moderate supply believes there is a good chance of securing this meal of the day coming 30 minutes after taking
share, this could be a huge business, which will become clear over the next 6-9 Linzess. Trulance can be taken at any time of day,
opportunity for NLL should it months. with or without food.
fructify
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NEULAND LABS : INITIATING COVERAGE
Trulance is a high volume product, and per the mgt, CMS growth trajectory: While we acknowledge that
API requirement is ~100kg annually. The market for all the potential opportunities may not fructify, it is
the approved indications is also growing rapidly (2x clear that the potential for NLL’s business to grow
While we acknowledge that
over 2014-2016). With plans to price the API at Rs quickly non-linearly is high, and that the strong
all the potential opportunities technical skills and cost competencies will ensure a
12.5mn/kg, even at a moderate supply share, this
may not fructify, it is clear could be a huge opportunity for NLL should it fructify. sustainable flow of such lucrative opportunities.
that the potential for NLL’s FY18E was a washout due to a number of factors,
business to grow quickly non- The US Prescription Constipation Market Has such as low orders from existing customers and
linearly is high, and that the Grown 2x Over 2014-2016 inflexible capacities. However, as NLL’s nascent
strong technical skills and cost pipeline begins to fructify, we believe that there is
competencies will ensure a significant scope for both secular and non-linear
sustainable flow of such growth. Significant opportunities like Austedo and
lucrative opportunities Trulance being added to the commercial product pool
are key monitorables. Foresee 16% CAGR in the CMS
segment over FY18-FY20E. Expect the EBITDA
contribution to jump from ~30% in FY18 to ~46% in
FY20E.
Foresee 16% CAGR in the CMS CMS Revenue To Grow 16% CAGR Over FY17-20E
segment over FY18-FY20E. CMS (Rs bn) YoY Growth (%)
Expect the EBITDA 65.0
61.4
contribution to jump from
~30% in FY18 to ~46% in Source: Company, HDFC Sec Inst Research
FY20E 42.1
Trulance Opportunity 25.0
Peak 19.1
FY19E FY20E
Potential
Potential
100 100 100
requirement (kgs)
Share assumed 5% 25% 50% 0.6 0.9 1.4 1.0 (25.0) 1.3 2.2
Supply (kgs) 5 25 50
FY15
FY16
FY17
FY18E
FY19E
FY20E
NLL sales (Rs mn) 63 313 625
PAT 18 88 175
EPS 2.0 9.8 19.7 Source: Company, HDFC Sec Inst Research
Source: Company, HDFC Sec Inst Research
Page | 16
NEULAND LABS : INITIATING COVERAGE
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NEU
Financial analysis
One of the key reasons behind
the margin fall in FY18 has Margins on upward trajectory: One of the key Working capital: One of NLL’s key issues in the past
been negative operating reasons behind the margin fall in FY18 has been has been a stretched working capital cycle, and the
leverage negative operating leverage. We believe that has the mgt has worked hard at improving this aspect. FY18,
business recovers, operating leverage will return and being a one-off year with a substantial drop in the
margins will recover significantly. However, with new business, led to a lot of disruptions. NLL’s inventory
facility acquisition, NLL is also likely to see increased levels have increased over Mar-17 (especially of
We factor in only a partial costs. It is also planning to initially use the facility for intermediates) resulting from lower sales during
recovery (vs FY17 levels) in backward integration, which will take some time to 9MFY18. Reducing this is a key focus of the mgt, and
FY19E, and a significant jump translate into a margin boost. As a result, we factor in inventory levels are expected to begin coming down
in FY20E (~250bps over FY17- only a partial recovery (vs FY17 levels) in FY19E, and a by the end of FY18E as the business starts to recover
20E overall) significant jump in FY20E (~250bps over FY17-20E from 4QFY18E. Going ahead too, we expect the
overall). This jump would largely be driven by (1) improvement in the working capital cycle to continue
higher contribution from the CMS business especially as NLL works on its inventory and receivables
FY18, being a one-off year from high margin products like Austedo and Trulance, management. We expect the cash conversion cycle to
with a substantial drop in the (2) increasing sales of important niche molecules like settle at ~120 days by FY20E.
salmeterol, and (3) operating leverage.
business, led to a lot of
disruptions. NLL’s inventory ~250bps Margin Expansion Over FY17-20E Working Capital Cycle To Improve
levels (especially of EBITDA (Rs bn) EBITDA Margins (%)
Cash Conversion Cycle Inventory Days
intermediates) have increased 17.9
180 Debtor Days Payable Days
over Mar-17 resulting from 15.9 15.4
15.2 14.5
lower sales during 9MFY18 14.2 160
12.7 140
9.8 120
100
Going ahead, we expect the
80
improvement in the working 60
capital cycle to continue as 40
NLL works on its inventory 20
0.6 0.7 0.7 0.8 0.9 0.5 0.9 1.3
and receivables management. 0
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY12
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
conversion cycle to settle at
~120 days by FY20E. Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Page | 18
NEULAND LABS : INITIATING COVERAGE
Debt situation: Apart from a stretched working significantly going forward. An improvement in the
capital cycle, high leverage has been another business and better working capital management
With the mgt placing a lot of would lead to higher FCF generation and debt
historical issue for NLL, with the company having
attention on reducing reduction down the road. We expect a net-debt to
raised funds on a few occassions to either augment
leverage, NLL brought down working capital or retire long-term debt. With the equity of 0.8x by FY20E.
its net debt to equity from mgt placing a lot of attention on reducing leverage,
2.1x in FY13, to 0.8x in FY17 NLL brought down its net debt to equity from 2.1x in Return ratios: FY18E caused NLL’s return ratios to dip
FY13, to 0.8x in FY17. However, the recent additonal sharply largely due to negative operating leverage.
infusion of Rs 1bn in debt for the acquisition of the Also, a heavier balance sheet due to the acquisition
The net-debt to equity is now new facility has placed further weight on the balance of the new Unit 3 caused a further dilution. We
~1.3x and the interest cost to sheet and P&L. The net-debt to equity is now ~1.3x believe that a full recovery will only be possible by
and the interest cost to PAT would be ~250% in FY20E with a substantially higher top-line and
PAT would be ~250% in
FY18E. However, we believe that this would improve profitability and higher utilization of the new facility.
FY18E. However, we believe
that this would improve
significantly going forward. Facility Acquisition Leads To Debt Infusion Return Ratios To Recover Fully Only By FY20E
We expect a net-debt to Net Debt (Rs bn) Net D/E (x) RoE (%) RoCE (%)
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
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NEU
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NEULAND LABS : INITIATING COVERAGE
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NEULAND LABS : INITIATING COVERAGE
Valuation
At CMP, NLL is trading at 22.x FY19E and 10.6x FY20E EPS, Risks to our investment thesis:
~40% discount (FY20 basis) to its peer (small-mid cap Unfavourable foreign currency fluctuations
Valuations to move closer to 3 API/CRAMs companies) average after a steep correction Unfavourable pricing environment in end supplies
over the last few months. We believe that investors (APIs and intermediates) and raw materials
year average owing to
recovery post FY18E, strong
should use this opportunity to enter the stock due to the Failure to convert potential CMS business
following reasons: opportunities into confirmed projects
EPS outlook and improving
return ratios
Business likely to have bottomed out in 3QFY18 with NLL P/E Band
volumes in key prime APIs and the CMS business Avg P/E 1 yr fwd P/E Last 3 year average
returning from 4QFY18
200.0
A strong earnings outlook; 21% CAGR over FY17-20E
backed by 7% revenue CAGR
150.0
Improvement in RoIC from 13% in FY17 to ~19% by
FY20E
100.0
We value NLL at 16x FY20E EPS, arriving at a TP of Rs
1,065/sh, implying ~51% upside. 44.7
50.0
Key catalysts
Launch of generic salmeterol in the US 0.0
Mar-17
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-18
Fructification of important potential CMS
opportunities like Trulance
Margin expansion via vertical integration and
Source: HDFC Sec Inst Research
operating leverage
Peer Valuations
Ease of capacity issues post Unit 3 coming on-stream
Peer Valuations
Mcap CMP Adj EPS (Rs/sh) P/E (x) RoE (%)
Reco TP
(Rs bn) (Rs/sh) FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E
Divi's Labs 269 1,014 BUY 1,100 39.9 33.9 44.9 51.7 27.2 32.0 24.2 21.0 22.0 15.9 18.7 19.0
Syngene International* 114 570 NR N/A 14.7 14.8 18.2 22.2 38.8 38.5 31.3 25.7 23.6 18.6 19.0 19.6
Laurus Labs* 57 535 NR N/A 20.8 18.6 27.0 36.4 25.7 28.8 19.8 14.7 17.9 13.0 16.4 18.3
Dishman Carbogen Amcis 52 322 BUY 480 9.0 10.4 15.3 22.6 35.7 30.8 21.0 14.3 3.0 3.5 4.9 6.8
Suven Life Sciences* 23 183 NR N/A 9.7 10.4 11.3 11.4 18.9 17.6 16.2 16.1 18.2 16.9 14.9 14.2
Aarti Drugs* 13 565 NR N/A 30.8 33.9 45.6 57.2 18.4 16.7 12.4 9.9 19.9 18.2 21.3 22.8
Neuland Labs 6 704 BUY 1,065 37.1 9.0 32.0 66.4 19.0 78.4 22.0 10.6 16.2 3.6 11.8 21.1
Source: HDFC sec Inst Research
*Bloomberg estimates
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NEULAND LABS : INITIATING COVERAGE
Key Management
Director Designation Education Description
Prior to promoting Neuland, he held senior positions in
Masters in Science, PGD
Davuluri Rama Mohan R&D, production and quality assurance at Glaxo India for
Chairman and MD from IIT Kharagpur and
Rao about ten years and was Director, R&D and QA at Unique
PhD in Organic Chem.
Chemicals, Mumbai.
He was Production Group Leader in Cummins Inc., U.S.A.
and later went on to become a green belt in Six Sigma. His
Vice-Chairman and Mechanical Engineer,
Davuluri Sucheth Rao background primarily consists of exposure to various fields
CEO MBA
of business such as marketing, finance, manufacturing,
operations and information technology.
Joint Managing Engineering grad., Previously he has worked with Sify Limited for nearly 3
Davuluri Saharsh Rao
Director Masters in MIS & MBA years.
Source: Company
Board of Directors
More than 40 years of experience in the field of drug
PhD in Organic Chem. discovery, development and manufacturing, been
from Purdue and his awarded more than 60 patents and published more than
Christopher M. Cimarust Non-Executive Director
Postdoctoral Research 40 papers in referred journals. Prev. held executive
from Columbia Univ. leadership positions at Bristol-Myers Squibb (BMS) in
discovery and development.
45 years experience in the pharmaceutical industry. Held
several senior positions in Glaxo India, (MD, Executive
Humayun Dhanrajgir Independent Director B.Tech, MI, CHEM (E)
Vice-Chairman). Past President of Organization of
Pharmaceutical Producers of India.
Eminent banker. 32 years with the State Bank of India. He
Parampally Vasudeva
Independent Director MA (Econ), CAIIB set up and became Managing Director of ICICI Bank in
Maiya
1994. Retired as Chairman & CEO of ICICI in 1998.
Expert in corporate strategy, alliance strategy and
Will Gordon Mitchell Independent Director PhD from UC, Berkely
dynamics of the health care industry.
Over 40 years of experience in the banking and financial
sector, having joined SBI in 1972. She has held positions
Mrs. Bharati Rao Independent Director N/A and titles covering areas such as project finance, credit
and risk management, development of foreign offices,
human resources and mergers and acquisitions.
She is a specialist in Health Information Systems,
Masters in statistics, monitoring and evaluation of Health & Welfare programs
Ms. Nirmala Murthy Independent Director doctorate from Harvard and has designed several management training programs
School of Public Health for health care providers working at different levels in the
public health system.
Source: Company
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NEULAND LABS : INITIATING COVERAGE
71 65
57 56 51
(13.2) 49 44
Revenue mix expected to shift 4.6 4.7 4.7 5.1 5.7 5.0 5.9 7.1
with higher proportion of
FY16
FY14
FY15
FY17
FY18E
FY19E
FY20E
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
income from niche APIs and
CMS
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
16% CAGR In CMS Business Over FY17-20E 8% CAGR In Niche API Business Over FY17-20E
CMS (Rs bn) YoY Growth (%) Niche APIs (Rs bn) YoY Growth (%)
65.0
61.4 34.4
33.4
0.6 0.9 1.4 1.0 (25.0) 1.3 2.2 1.0 1.4 1.5 1.2 1.6 1.9
FY15
FY16
FY17
FY19E
FY18E
FY20E
FY15
FY16
FY17
FY18E
FY19E
FY20E
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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NEU
Muted Growth In The Prime API Segment ~250bps Margin Expansion Over FY17-20E
Prime APIs (Rs bn) YoY Growth (%) EBITDA (Rs bn) EBITDA Margins (%)
8.8
The prime API business is 17.9
expected to record sluggish 15.9 15.4
15.2 14.5
3.7 14.2
growth with increasing 12.7
volumes being offset by
0.0 9.8
pricing pressure
(3.2)
(4.7)
(7.8)
The EBITDA margin will scale 3.0 2.9 2.8 2.8 3.1 3.2 0.6 0.7 0.7 0.8 0.9 0.5 0.9 1.3
up on the back of recovery in
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
niche APIs and CMS
businesses and launch of
lucrative projects in the CMS Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
business
~21% Earnings CAGR Over FY17-20E Return Ratios To Recover Fully Only By FY20E
Net Profits (Rs mn) YoY Growth (%) RoE (%) RoCE (%)
94.5
68.2 15.7 16.2
4.3 11.8
(40.5) 22.1 11.2
(75.8)
Return ratios will recover fully
268
160
269
328
283
587
79
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
investment in Dec-17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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NEULAND LABS : INITIATING COVERAGE
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NEULAND LABS : INITIATING COVERAGE
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NEULAND LABS : INITIATING COVERAGE
RECOMMENDATION HISTORY
Date CMP Reco Target
15-Mar-18 704 BUY 1,065
Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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NEULAND LABS : INITIATING COVERAGE
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NEULAND LABS : INITIATING COVERAGE
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