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After having their moment in the sun during the Covid pandemic, the domestic pharmaceutical industry, particularly active pharmaceutical ingredient or API manufacturers have seen their progress slowing to a crawl. The extraordinary growth of FY21 and FY22 has moderated in the following years due to demand normalisation and opening up of the Chinese economy that intensified price erosion. But we have come across a company that stands out- Neuland Laboratories -a small-cap API player that is head and shoulders above the rest.
The company has been holding fort against industry headwinds, clocking an annual revenue and operating profit growth of 18.5 and 55.5 per cent, respectively, since FY21 against a broader decline in the performance of other major API peers. The impressive growth is reflected in the company's share as well, which has surged 2.5 times in the last year (closing price as of July 21, 2024).
Capturing Neuland's phenomenal growth in numbers
Its operating profit has grown over 5 times since FY20
| FY24 | FY23 | FY22 | FY21 | FY20 | |
|---|---|---|---|---|---|
| Revenue (Rs crore) | 1,559 | 1,191 | 951 | 937 | 763 |
| EBIT (Rs crore) | 403 | 219 | 94 | 107 | 71 |
| CFO (Rs crore) | 261 | 237 | 60 | 189 | 57 |
| EBIT margin (%) | 27 | 19 | 10 | 13 | 10 |
| ROCE (%) | 34 | 21 | 9 | 13 | 8 |
|
ROCE is return on capital employed CFO is cash flow from operations |
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How did Neuland manage to grow so impressively when the entire API industry has been struggling? The secret sauce was a shift in its business strategy.
The pivot
Neuland manufactures over 100 APIs across 10 different therapeutics. These off-patent generic APIs were the mainstay of its operations and core business. However, fierce competition and low profit margins in generics forced the company to change tracks.
In FY21, it pivoted towards the high-risk, high-margin custom manufacturing segment (CMS). Custom API manufacturing means tailoring production of pharma ingredients to meet unique client requirements and regulatory standards of a particular drug. Under this segment, the company began manufacturing complex APIs for commercial novel molecules (newly discovered or created). It began their supply to innovator pharma and biotech companies for clinical trials in lower volumes. This helped it create a strong portfolio of early-stage drugs and later win large orders as they progressed from clinical stages to commercial operations.
Consequently, its CMS business' topline grew rapidly by 42 per cent per annum between FY20 and FY24. Its share in Neuland's total revenue also jumped from 25 per cent to 49 per cent during this period, turbocharging the company's operating profit margins to a record high of 27 per cent in FY24, a sharp increase of 16 percentage points from FY20 levels.
Will the bumper growth sustain?
The company is at the top of the pile in the API industry, thanks to its standout growth in the CMS business. However, the growth spurt may be entering moderation. Below are some risk factors that investors must not overlook before making an investment decision:
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The management is confident of sustaining its double-digit growth through FY26, but they have projected this will be slower than before due to a decline in global biotech spending that is underway from FY23.
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As of March 2024, about 88 projects under its CMS segment were in the pipeline in different clinical phases. But only 36 per cent of them belong to the high-volume commercial and pre-clinical segment, which is the lowest in the last four years. The pipeline of its novel APIs has also shrunk to 16 in FY24 from 25 in FY21.
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Its revenue concentration is also of concern as its top 10 clients accounted for 91 per cent of its total revenue from the CMS business in FY24.
- Lastly, the company still makes a major chunk of revenue from the generic API business, which has been growing poorly by just 8 per cent annually since FY20.
Also read: This pharma bluechip is springing back to life. Is it worth your consideration?
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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