by Suhani Adilabadkar

Neuland Laboratories reported a stellar June performance with double digit revenue growth, and PAT nearly trebling YoY. Established in 1984, Neuland is a pharma manufacturer providing active pharmaceutical ingredients (APIs), complex intermediates and custom manufacturing solutions, developing more than 300 processes, 75 APIs and over 880 regulatory filings in the US, EU and other geographies.

Present globally across the US, Europe, MENA-LATAM-APAC regions and Japan, Neuland has three regulatory approved manufacturing facilities with 731 KL capacity in and around Hyderabad.

Quick Takes

• Despite challenging conditions, revenues jumped 13.5% YoY, operating profit grew 81% YoY and PAT increased 166% YoY in Q1 FY21.
• Imports from China have increased 25-30% over the past five years mainly due to lower manufacturing cost and slow policy movement with respect to governmental clearances in India.
• The CMS business grew 105% YoY in FY20 and the management expects CMS business to be about one third of total revenues in the near future.
• Stock price of Neuland Labs jumped 300% from its 52-week low and gained 146% over the past three months.

June Quarter FY21

Neuland came out with robust June numbers, and commenting on Q1 FY21 results, Mr. Saharsh Davuluri, Joint MD, Neuland Laboratories said, “Despite challenging conditions, we turned out revenue of about Rs. 206 crores which is the highest ever by Neuland in a quarter in our history. This translated to revenue growth of about 13.5% over the last fiscal quarter and sequentially also it is 6.4% growth. And I am pleased that the growth has been driven by all round performance both in GDS as well as CMS segments of our business”. 

Operating profit, too moved with double-digit momentum for the June quarter, rising 81% YoY from Rs. 18.7 crore in Q1 FY20 to Rs. 33.8 crore in Q1 FY21. Operating margins were driven by an improved product mix and strong cost optimization measures, expanding more than 600 bps, reported at 16.48% in Q1 FY21 against 10.31% corresponding June quarter FY20.

Net Profit or PAT stood at Rs. 15.2 crore in Q1 FY21 compared to Rs. 5.7 crore same period previous year rising 166% YoY. Stock price of Neuland Labs has jumped 300% from its 52-week low and gained 146% over the past three months.

Strong performance combined with positive sentiment

It has been déjà vu for the Indian pharmaceutical industry, facing the same predicament similar to 2017 after the Doklam issue. India, the ‘Pharmacy of the World’, is now the largest manufacturer of generic drugs globally, and imports 60-70% of its APIs/ intermediates by value from China.

Covid-19 and recent political tensions have been a wake-up call for global buyers in the pharma sector and for Indian pharma firms. Indian pharma companies, highly dependent on Chinese imports, have faced supply disruptions and rising API prices. China is known for its low-cost high-volume ingredients and accounts for about 40% of all APIs used worldwide.

For India, imports from China have increased 25-30% over the past five years, mainly because of an approximately 20% lower manufacturing cost in Chinese factories and slow policy movement with respect to governmental clearances for Indian manufacturers. Indian API/bulk drug market with a market size of around Rs. 735 bn has been growing at a CAGR of about 9% over the past five years. Neuland Labs has been functioning in this arena for the past 35 years, as a pure play API manufacturer.

Neuland operates through two main business segments, GDS (generic drug substances) catering to the requirements of generic players and CMS (contract manufacturing services) primarily serving pharma and biotech companies. GDS is spilt into Prime APIs, highly competitive, high volume, low value APIs and specialty APIs comprising high-value, complex molecules which necessitate R&D expertise to manufacture consistent quality products.

Next comes Neuland’s high-risk, high-margin and relatively uncrowded CMS segment aided by strength in research and quality compliant facilities. In June quarter FY21, prime APIs contributed 46% revenues, followed by 27% by speciality, and CMS putting in 21% in revenue basket. After the growth tremors in FY18 due to capacity imbalances and product mix issues impacting margins which contracted more than 800 bps and PAT exhibiting degrowth of 74% YoY, growth resumed from FY19.

Moving on to the present Covid hit scenario, the second half of FY20 witnessed improved cost control and better pricing as product quality, environmental and supply chain disruptions impacted the reliability of Chinese API manufacturers. Though this has definitely benefited API manufacturers in India and other Asian countries, the possible resurgence of API manufacturing in Europe and US will change industry dynamics in the long run as companies with superior technology move their supply chains closer home.

Two-Pronged Growth Strategy

 Neuland Labs with its technology upgrades and API arsenal has chalked out a growth strategy for all its three business segments. In this respect, Mr. Sucheth Davuluri, Vice Chairman and CEO, Neuland Laboratories said, “Our strategy is different across segments. For the prime API business segment our strategy is to add new customers for market penetration, and increase Neuland’s market share across the global market. For the specialty API segment, the focus has been on technology patterns, supplying sterile API, complex APIs where we do not expect too much competition and obviously contract manufacturing side is where we also see huge opportunity”.

But the management is also aware that while an equal emphasis on all three segments is required to maintain overall growth, for long term margin and profit sustainability it is essential to improve its product mix driven by high margin-high value specialty and highly profitable CMS segments. And Neuland is moving towards this as its prime revenue proportion has declined from 54% in FY18 to 46% in FY20 while speciality and CMS together have jumped from 40% in FY18 to 47% in FY20 revenue mix.

Consequently, operating margins improved 380 bps while operating profit and PAT have moved at a CAGR of 42% and 16% respectively over the past two years after witnessing double digit negative growth in FY18. In addition to this, the street is excited about Neuland’s CMS business, which has grown 105% YoY in FY20. CMS projects have also doubled YoY and the company management expects CMS business to be about one third of total revenues in the near future.

Along with this growth driver, the sunrise space of peptides in the GDS segment has 2-3 complex generic peptide APIs under development, and the company expects to file DMFs in the next 2 years - positive signals for its long-term growth trajectory.

And lastly, Unit III yet to be commercialized in second quarter FY21 and with current revenues accruing from just 73% installed capacity (Unit I & Unit II), growth is definitely in the offing. Overall the growth picture looks promising, and Neuland’s management has been guiding a 20% growth rate and 20% EBDITA margin over the past few years. Whether Covid-19 will help in fulfilling management’s aspirational growth targets, only time will tell.